Land Value Taxation will solve many of the 21st century's most serious social, economic and environmental problems, and promote justice, fairness and sustainability. We CAN have a world in which all can prosper.

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Pages I refer to often

Progress and Poverty, by Henry GeorgeHere are links to online editions of George's landmark book, Progress & Poverty, including audio and a number of abridgments -- the shortest is 30 words! I commend this book to your attention, if you are concerned about economic justice, poverty, sprawl, energy use, pollution, wages, housing affordability. Its observations will change how you approach all these problems. A mind-opening experience!

Books I Value

Henry George: Progress and Poverty: An inquiry into the cause of industrial depressions and of increase of want with increase of wealth ... The RemedyThis is perhaps the most important book ever written on the subjects of poverty, political economy, how we might live together in a society dedicated to the ideals Americans claim to believe are self-evident. It will provide you new lenses through which to view many of our most serious problems and how we might go about solving them: poverty, sprawl, long commutes, despoilation of the environment, housing affordability, wealth concentration, income concentration, concentration of power, low wages, etc. Read it online, or in hardcopy.

Bob Drake's abridgement of Henry George's original: Progress and Poverty: Why There Are Recessions and Poverty Amid Plenty -- And What To Do About It!This is a very readable thought-by-thought updating of Henry George's longer book, written in the language of a newsweekly. A fine way to get to know Henry George's ideas. Available online at progressandpoverty.org and http://www.henrygeorge.org/pcontents.htm

Where Else Might You Look?

Wealth and WantThe URL comes from the subtitle to Progress & Poverty -- and the goal is widely shared prosperity in the 21st century. How do we get there from here? A roadmap and a reference source.

Reforming the Property Tax for the Common GoodI'm a tax reform activist who seeks to promote fairness and reduce poverty. Let's start with the enabling legislation and state requirements for the property tax. There are opportunities for great good!

"In a study of 2010 nationwide property tax rates, the average homeowner paid a median of 1.14 percent of home value that year, according to the Tax Foundation, a research group. In Manhattan, that figure was 0.78 percent. For the $88 million apartment at 15 Central Park West, 0.78 percent would be $686,000. But this year, the property taxes due on that penthouse were $59,000."

Just think how much productive activity we could untax were we-the-people to collect some portion of that annual land rent for public purposes. And consider how unproductive the Lords of Land are. What have they done to earn that land rent? Is our "tradition" -- to let them keep it -- a wise or just one, or is it part of our wealth concentration structure?

Here are the two articles, with a couple of calculations added: (Notice that acreage is not even mentioned!)

The ground beneath Trump Plaza, at 167 E. 61st St., is up for sale as land prices break records. Manhattan’s surging land costs are leaving the shareholders of an East Side luxury co-operative with a tough choice: pay a hefty price to buy the land under the building, or face increasing bills to keep renting it.

The ground beneath Trump Plaza, at 167 E. 61st St., is up for sale as land prices break records. The co-op board has offered to buy the property for $185 million, a cost that would saddle residents with assessments that, for some, would top $1 million, said Adam Leitman Bailey, a New York real estate attorney who has been contacted by owners concerned about the deal before it goes into contract.

“People are calling me to stop this from happening,” said Bailey, who has reviewed board documents but hasn’t been officially retained. “People want to stop the assessment.”

The 31-year-old co-op, which makes annual rent payments to the family that owns the ground, is weighing its financial future at a time when rising prices for land make it attractive for investors to buy such property for a reliable stream of rental income. The board opted to put in a bid as it otherwise faces the prospect of a steep rent increase when the lease resets in 2024, Bailey said.

“The fact that the family put it up for sale should terrify the co-op,” said Joshua Stein, a Manhattan real estate attorney who isn’t involved in the transaction.

“Whatever opportunistic investor buys the land will probably be way more aggressive about the rent reset than either an estate or a group of heirs,” he said. “Someone who is buying it, is buying it specifically to squeeze out every last dollar of rent.”

Monthly Payments

Marc Cooper, president of the co-op board and vice chairman of investment-banking firm Peter J. Solomon Co., didn’t return a phone call left at his office yesterday seeking comment on the plan to purchase the ground.

Co-op residents buy shares in a corporation that owns the building, rather than getting a deed to the apartment itself, as they would in a condominium. Shareholders make monthly maintenance payments that collectively cover building costs such as mortgage payments, ground rent and operating expenses.

A Trump Plaza shareholder with a 1,000-square-foot (93-square-meter) one-bedroom apartment whose monthly maintenance fee is now about $2,100 would pay about $9,800 after the rent is recalculated in 10 years, Bailey said, citing a projection by the building’s co-op board. The rent increase would be about 8 percent of what the land value is in 2024, he said.

Record Prices

Buildable lots in Manhattan sold for an average of $657 a square foot in the third quarter, up 29 percent from a year earlier and an all-time high for the period, according to Massey Knakal Realty Services. Three purchases completed in the quarter were for more than $1,000 a square foot, the firm’s data show.

LVTfan here: That $657 per square foot is NOT per square foot of land (at 43,560 sq ft per acre, that would be just $28.6 million per acre, laughably low in Manhattan). Rather, it is per buildable square foot. Quick and dirty, if a, say, 20 story building can be built on a 10,000 sf footprint, constituting 200,000 sf, the calculation would be 200,000 times $657, or $131.4 million, for that 1/4 acre, which works out to over $500 million per acre. $500 million per acre -- compared to an acre of good agricultural land, at $5,000 per acre, that's 100,000:1. (And for those 3 purchases over $1,000 psf, add 50% to that ratio.)

Possibly difficult for those of us who see land which sells for $5,000 or $50,000 or even $500,000 per acre to fathom $500 million per acre. But that's reality!

Trump Plaza’s situation is different from most other co-operatives in Manhattan, which do own the land on which the building sits and make no rent payments. Co-op units with ground leases tend to sell at a discount because they have higher maintenance costs and buyers sometimes face challenges getting mortgage financing. Other ground-lease co-ops in New York include 995 Fifth Ave., the Excelsior at 303 E. 57th St. and Carnegie House at 100 W. 57th St.

Carnegie House

The ground beneath the 324-unit Carnegie House was purchased for $285 million to a group that includes Rubin Schron’s Cammeby’s International and real estate investor David Werner, Christa Segalini, a spokeswoman for Cammeby’s, said today. The 21-story building, with an entrance on Sixth Avenue, occupies an entire block front from 56th Street to 57th Street, according to real estate website Streeteasy.com.

For shareholders at Trump Plaza, buying the land beneath them means coming up with large sums of cash up front. Each owner was assessed a fee of about $2,329.40 a share, according to Bailey.

A resident of a two-bedroom unit who holds 440 shares in the corporation, for example, would be charged $1.02 million, Bailey said. A 1,600-square-foot three-bedroom apartment, worth 671 shares, would get a $1.56 million assessment. Residents get more shares the higher up their apartments are in the 39-story building.

The 154-unit Trump Plaza, at 61st Street and Third Avenue, was completed in 1983, according to StreetEasy. A 2,800-square-foot unit on the 32nd floor with views of Central Park is listed for sale at $3.95 million. The monthly maintenance charge for the three-bedroom, four-bathroom apartment is $7,228, according to the website.

LVTfan here: One might reasonably wonder how much (a) the sellers of the land were paying NYC in property taxes; (b) how much of the monthly "maintenance charge" for the condo is paid by the condo complex to the city in property taxes (which pay for the schools and lots of other public services) and how much is for the building and its services to the condo owners; and (c) how much the land share of that 32nd floor unit is. If a 1600sf apartment gets a $1.56 million assessment, the 32nd floor apartment, at 2800sf should be roughly twice that, or about $3 million. Thus, the $3.95 million asking price on the 32nd floor is about 4/7 of the total value, or 56%; the other 44% is land value.

Resale Value

The sale of the ground beneath the tower hasn’t gone into contract yet. Douglas Harmon and Adam Spies, brokers at Eastdil Secured LLC, are representing the owners, who are listed in public records as the estate of Donald S. Ruth and members of the Ruth family. Spies declined to comment on plans for the sale.

A purchase of the land by the co-op ultimately would add resale value to the building’s apartments, Stein said. Extinguishing the ground lease permanently removes the threat that rents will reset to unaffordable levels. With that uncertainty gone, future buyers would be willing to pay more for a unit in the tower, he said.

“If you’re the co-op, getting rid of that threat is a really good thing,” Stein said. “There’s a lot of value being created.”

To contact the reporter on this story: Oshrat Carmiel in New York at ocarmiel1@bloomberg.net

To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net Christine Maurus

Werner-led group pays $285M for land under 100 West 57th Street: sources

David Werner, a Borough Park investor who has wowed New York City with a series of big buys this year, partnered with Rubin Schron and the Cohen family to pay $285 million for the land under 100 West 57th Street, sources told The Real Deal. The 324-unit Carnegie House cooperative building is the ground tenant on the property.

A person close to the deal said the investment group closed yesterday on the purchase of the property, which is located at the corner of Sixth Avenue and 57th Street.

Insiders expect to see more pricey sales of land under co-op buildings with resets looming.

In fact, the sale is being mirrored nearby with the marketing of the ground under the Trump Plaza at 167 East 61st Street, which has a rent reset in 2024. Eastdil Secured brokers Doug Harmon and Adam Spies have that listing.

The co-op building has a ground lease that runs for another 51 years with the property owner, currently paying about $4.4 million per year. In approximately 10 years, the rent for the ground lease payments will reset. That reset will be based on market values.

an average of $13,600 per year per family -- ignoring the commercial tenants

Ground resets typically price the new rent at about 6 percent of the current market value.

Investment sales broker Robert Knakal, chairman of Massey Knakal Realty Services, estimated the value of the land to be at least $1,200 per square foot and up to $1,500 per foot, if the value of the retail is taken into consideration. Knakal is not involved in this property.

At that value, the land with 377,000 square feet of development rights, would be worth $452 million. That could work out to an annual rent payment of $27 million per year, if reset today, according to an analysis by TRD.

An average of $83,300 per family -- ignoring the commercial tenants

To help fund the purchase, the group obtained a $180 million loan from Natixis Capital Markets in a deal arranged by Drew Anderman, a senior managing director at the mortgage brokerage firm Meridian Capital Group, insiders familiar with the deal said.

November 26, 2013

Is a land value tax the solution to our housing affordability problem?

By Catherine Cashmore | Monday, 25 November 2013

There’s been a lot of debate around property taxation in Australia - significantly negative gearing, which allows an investor to use the short fall between interest repayments and other relevant expenditure, to lower their income tax.

The policy promotes speculative gain meaning the strategy is only profitable if the acquisition rise in value rather than holding or falling - therefore, in Australia, investor preference is slanted toward the established sector – the sector that attracts robust demand from all demographics and as such, in premium locations, has historically gained the greatest windfall from capital gains.

Aside from the impact this creates in terms of affordability (pushing up the price of second-hand stock, burdening new buyers with the need to raise a higher and higher deposit just to enter ownership), it also negatively affects the the new home market, which traditionally struggles to attract consistent activity outside of targeted first home buyer incentive; albeit, the headwinds resulting from planning constraints and supply side policy should also not be dismissed.

Additionally, capital gains tax and stamp duty have also received much debate. Both are transaction taxes, and therefore have a tendency to stagnate activity, acting as a deterrent to either buying and selling.

Stamp duty, as modelled by economist Andrew Leigh, is shown to produce a meaningful impact on housing turnover, leading to a potential mismatch between property size and household type – a deterrent to downsizing and therefore selling.

Additionally, it burdens first time buyers by increasing the amount they need to save in order to enter the market and frequent changes of employment concurrent with a modern day lifestyle, are hampered as owners, unwilling to move any meaningful distance outside their local neighbourhood, search for work in local areas alone.

But, outside of academia and intermittent articles, there is scant debate in Australian mainstream media regarding land value tax and it’s practical impact.

The theory is taken to its extreme and best advocated by American political economist and author, Henry George, who wrote his publication Progress and Poverty - an enlightened and impassioned read - and subsequently inspired the economic philosophy that came to be known as ‘Georgism.’

The ideals of Henry George reside in the concept that land is in fixed supply, therefore we can’t all benefit from economic advantage gained from ‘ownership’ of the ‘best’ sites available without effective taxation of the resource.

George advocated a single tax on the unimproved value of land to replace all other taxes – something that would be unlikely to hold water in current political circles. However, his ideals won favour amongst many, including the great economist and author of Capitalism and Freedom, Milton Friedman, and other influential capitalists such as Winston Churchill, who gave a powerful speech on land monopoly stressing:

“Unearned increments in land are not the only form of unearned or undeserved profit, but they are the principal form of unearned increment, and they are derived from processes which are not merely not beneficial, but positively detrimental to the general public.”

In essence, raising the percentage of tax that falls on the unimproved value of land has few distortionary or adverse affects. It creates a steady source of revenue whilst the landowner can make their own assessment regarding the timing and type of property they wish to construct in order to make profit without being penalised for doing so.

However, when the larger percentage of tax payable is assessed against the value of buildings and their improvements – through renovation, extension or higher density development for example – not only can those costs be transferred to a tenant, there is less motivation to make effective use of the site. This has a flow on effect which can not only exacerbate urban ‘sprawl’, but also increase the propensity to ‘land bank.’

The Henry tax review commissioned by the government under Kevin Rudd in 2008 concluded that “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases,” proposing that stamp duty (which is an inconsistent and unequitable source of revenue) be replaced by a broad based land tax, levied on a per square metre and per land holding basis, rather than retaining present land tax arrangements.

And whilst it’s difficult to qualify how purchasers may factor an abolition of stamp duty into their price analysis, perhaps adding the additional saving into their borrowing capacity, and therefore not lowering prices enough to initially assist first homebuyers. It does demonstrate how over the longer-term falls in house prices have the potential to exceed the value of land tax payments, assisting both owner-occupier and rental tenant as the effects flow through.

Additionally, increasing the tax base would provide developers with an incentive to speed up the process and utilise their holding for more effective purposes.

And importantly for Australia, it can provide a reliable provision of revenue to channel into the development of much-needed infrastructure.

The rational for this is coined in the old real estate term ‘location, location, location.’ Everyone understands that in areas where amenities are plentiful – containing good schools, roads, public transport, bustling shopping strips, parks, theatres, bars, street cafes and so forth – increases demand and therefore land values, invoking a vibrant sense of community which attracts business and benefits the economy.

The idea behind spruiking a ‘hotspot’, such a common industry obsession, is based on purchasing in an area of limited supply, on the cusp of an infrastructure boom such as the provision of a new road or train line for example, enabling existing landowners to reap a windfall from capital gains and rental demand for little more effort than the advantage of getting in early and holding tight whilst tax payer dollars across the spectrum fund the work.

Should a higher LVT be implemented, the cost and maintenance of community facilities could in part, be captured from the wealth effect advantaging current owners, compensating over time for the initial outlay. Imagine the advantage this would offer residents in fringe locations who sit and wait for the failed ‘promises’ offered, when they migrated to the outer suburbs initially.

Take New York for example – between the years 1921 and 1931 under Governor Al Smith, New York financed what is arguably the world’s best mass transit system, colleges, parks, libraries, schools and social services shifting taxes off buildings and onto land values and channelling those dollars effectively.

The policy influenced by Henry George ended soon after Al Smith’s administration, and eventually lead to todays landscape - a city built on a series of islands, with limited room to ‘build out’ facing a chronic affordable housing shortage with the population projected to reach 9.1 million by 2030.

More than a third of New Yorkers spend half their pay cheque on rent alone yet like London, there is little motivation for developers to build housing to accommodate low-wage workers concentrating instead on the luxury end of market, broadening the gap between rich and poor as land values rise and those priced out, find little option but to re-locate.

New York’s Central Park is the highest generator of real estate wealth. The most expensive homes in the world surround the park with apartments selling in excess of $20 million, and newer developments marketed in excess of $100+ million.

Like London it’s a pure speculators paradise – in the 10 year period to 2007, values increased by 73% - owners sit on a pot of growing gold and there’s little to indicate America’s richest are about to bail out of their New York ‘addiction’ with an expansive list of A-list celebrities, high net worth individuals, and foreign magnates, owning apartments in the locality.

New mayor-elect, Bill de Blasio, who won his seat, based on a promise to narrow the widening inequality gap - preserve 200,000 low and middle income units, and ensure 50,000 affordable homes are constructed over the next decade, will struggle to subsidize plans whist facing a deficit reputed to be as much as $2 billion in the next fiscal year.

Yet economist Michael Hudson has recently assessed land values in New York City alone to exceed that of all of the plant and equipment in the entire country, combined.

Currently more than 30 countries around the world have implemented land value taxation - including Australia - with varying degrees of success not only based on the percentage split between land and property, but how those funds are channelled back into the community and the quality of land assessments in regularly updating and estimating value.

Pennsylvania is one such state in the USA to use a system which taxes land at a greater rate than improvements on property – I think I’m correct in saying 19 cities in Pennsylvania use land value tax with Altoona being the first municipality in the country to rely on land value tax alone.

Reportedly, 85% of home owners pay less with the policy than they do with the traditional flat-rate approach. When mayor of Washington county, Anthony Spossey, who also served as treasurer from 2002 to 2006 and under his watch enacted an LVT, was interviewed on the changes in 2007, he commented:

“LVT ..helps reduce taxes for our most vulnerable citizens. We have an aging demographic, like the county, region and the state. Taxpayers everywhere are less able to keep up with taxes, and that hurts revenue. LVT helps us mitigate the impact both to them and the city. It’s a win/win.”

Until fairly recent times, another good example to cite is Pittsburgh. Early in the 1900s the state changed its tax system to fall greater on the unimproved value of land than its construction and improvements.

Pittsburgh’s economic history is a study in itself, and has not been without challenges. For those wanting to research further, I strongly advocate some of the writings of Dan Sullivan - (former chair of the Libertarian Party of Allegheny County, (Pittsburgh) Pennsylvania) - who is an expert on the economic benefits of LVT and has written extensively on the subject.

Sullivan demonstrates that Pittsburgh not only enjoyed a construction boom whilst avoiding a real estate boom under a broad based LVT system, but also effectively weathered the great depression whilst maintaining affordable and steady land values along the way.

In comparing it to other states struggling to recover from the recent sub-prime crisis he points out:

“In 2008, just after the housing bubble broke, Cleveland led the nation in mortgage foreclosures per capita while Pittsburgh's foreclosure rate remained exceptionally low. Since then, the foreclosure rates in Las Vegas and many Californian cities, none of which collect significant real estate taxes, have passed Cleveland's foreclosure rate. However, on September 15, 2010, The Pittsburgh Post-Gazette reported that while at the end of the second quarter of 2010, 21.5% of America's single-family homes had underwater mortgages (the American term for negative equity), only 5.6% did in Pittsburgh. As a result Pittsburgh was top of a list of the 10 marketswith the lowest underwater mortgage figures.”

When land value tax is implemented - with the burden taken of buildings and their improvements, ensuring good quality assessments and sensible zoning laws – it not only assists affordability keeping land values stable, but also benefits local business through infrastructure funding, discourages urban sprawl, incites smart effective development of sites, reduces land banking, and as examples in the USA have demonstrated – assists in weathering the unwanted impacts of real estate booms and busts.

Despite the numerous examples across the world where a broad based land value tax has been deployed successfully, changing policy and bringing about reform is never easy and rarely without complication.

Additionally, the implications of a yearly tax on fixed low-income retirees must be handled with care and understanding, as there are ways to buffer unwanted effects whilst changes are implemented.

Therefore, the process adopted in the ACT which is abolishing stamp duties over a slow transitional 20 year period to phase in higher taxation of land is not altogether unwise.

With any change to the tax system, the headwinds come convincing the public that it’s a good idea. In this respect balanced debate and conversation is necessary, as questions and concerns are brought to the fore.

The increased tax burden also falls on those who have significant influence across the political spectrum; therefore strong leadership to avoid lobbying from wealthy owners with vested interests is essential.

Albeit, as I said last week, we have a new and growing generation of enlightened voters who are well and truly fed up with battling high real estate prices, inflated rents, and care not whether it’s labelled as a ‘bubble’ – but certainly care about their future and that of their children.

Therefore – I do see a time when all the chatter around affordability, will finally evolve into real action – and a broad based LVT should form an important part of that debate.

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.

September 04, 2012

The post below this one, "Mitt Romney's 'Fair Share' " refers to his fair share of the costs of providing public goods.

But perhaps an equally important question is the nature of one's fair share of the output of our economy and the output of the earth. Some of the former output is the result of individual efforts, and one ought to be able to keep that portion. But at the same time we must recognize how much comes from the division of labor, from drawing down on the non-infinite supply of non-renewable natural resources on which all of us today must depend and on which future generations of human beings must rely. Those who draw down more than their legitimate share owe something to the rest of the community. Our wealthiest tend, we suspect, to use many, many times their legitimate share, and the median American likely draws far more than their share, when one considers the planet as a whole.

Perhaps "legitimate" is not the right word here. It refers to what is permissible under current law. (The word gets misused a lot -- see the discussion on "legitimate rape," which seemed to be about the circumstances under which a woman has a right to make a specific very personal, decision, and when it is considered by some to not be left to her and is the province of government, legislators or others.)

What is one's "fair share" of natural resources? America is using a hugely disproportionate share of the world's resources. Are we entitled to it because we're somehow "exceptional"? Because "our" God is somehow better than other nation's Gods? Or do we genuinely believe that all people are created equal, and intend to live our lives accordingly?

Our output of greenhouse gases exceeds our share of the world's population. This is not without consequences for the world, and for peace on earth.

We ought to be re-examining our incentives so that they move us in the direction we ought to be going, which is, to my mind, using less. We can build transportation infrastructure which will permit many more of us to move around with less impact on the environment. We can fund that through collecting the increases in land value that infrastructure creates. We can correct the incentives which cause us to use today's inferior technologies to extract natural resources from the earth in ways which damage the environment, as if ours was the final generation, or the only one worth serious consideration.

Better incentives could reduce, eliminate, even reverse urban sprawl. I refer specifically to land value taxation as a replacement for the existing property tax, particularly in places where assessments are for one reason or another not consistent with current property values -- e.g., California and Florida, parts of Delaware and Pennsylvania which currently use assessments from the 1970s, and many other places where assessments are simply out of whack with current reality!) We should be replacing sales taxes, wage taxes, building taxes with taxes on land value and on natural resources. Most of that value is flowing generously into private or corporate pockets, to our detriment. It concentrates wealth, income, and, of course, political power.

Collecting the rent, instead of leaving the lion's share of it to be pocketed by the rent-seekers, would go a long way to making our society and our economy healthier. Eliminating the privilege of privatizing that which in a wisely designed society would be our common treasure would make our society a better place in which to live, a place in which all could thrive and prosper without victimizing their fellow human beings.

June 27, 2012

Dr. John Haynes Holmes Says Bosses Have No Right to Stop the Expression of the People's Will

Petitions asking for a referendum vote upon the question of reducing gradually the tax rate upon buildings in New York to one-half the tax rate upon land, through five consecutive reductions in as many years, were signed yesterday by several thousand persons at a mass-meeting held in Union Square under the auspices of the New York Congestion Committee. The meeting was announced as a public protest for lower rents.

Benjamin Clark Marsh, Executive Secretary of the Committee on Congestion of Population in New York, was Chairman. Dr. John Haynes Holmes of the Church of the Messiah said that the Legislature "in the wisdom of the Big Sachem at Fourteenth Street has decreed that the people are not fit to register their judgment as to this bill. I, for one, desire to protest against the boss or set of bosses who presume to forbid the people to express their will on any question."

Frederick Leubuscher, representing the New York State League of Savings and Loan Association, said:

"It was admitted by some of the land speculators at the hearing of the Lower Rents bill at Albany that they were unable to answer our arguments. Nevertheless, a Democratic majority stifled the bill. As a savings and loan association man, I am interested particularly in the enactment of this proposed law. The stimulation of the erection of buildings and the making of improvements generally will be more market in the suburbs, where modest homes, costing from $2,000 to $5,000 to erect, are most in demand."

The purpose of the law was explained in a letter from Assemblyman Michael Schaap, who introduced the Salant-Schaap bill in the lower House of the State Legislature.

"If the tax rate on buildings had been half that on land this year," he wrote, "the rents of the average tenant would have been at least one month's rent less than it was; owners of small houses would have paid $15 to $25 less taxes than they do, and there would be fewer than 9,000 evictions for non-payment of rent.

"The taxes on all adequately improved property would have been reduced and the city would have recovered almost $20,000,000 more of ground rent which now goes to a few people of New York and to absentee landlords. This ground rent at 6% is over $273,000,000. The people of the city have created and maintain these values, but they get less than $84,000,000 of it -- the land owners get the other $189,000,000. Rent and taxes on homes and other buildings would have been reduced by at least $20,000,000."

The Rev. Alexander Irvine said that one family out of every 150 in New York City was evicted for non-payment of rent, because of the unjust taxation of improved property as contrasted with vacant land. Only 3% of the residents of the city own land, the speaker asserted.

John J. Hopper, Chairman of the New York State Independence League, said:

"A tax upon anything tends to lessen the supply of that commodity. By the same principle a tax upon buildings tends to lessen their number. A bill tending to reduce the tax upon buildings will bring about the construction of more buildings, and as a result there will be more competition and a corresponding reduction in rents.

"The Legislature refused to let us decide this question for ourselves, asserting that we did not know enough to vote on the subject of taxation. When we realize that for the expenses of the National Government each one of us pays $7.50 a year; for the state expenses, $5.50 and for the city expenses $38.50, making a total of $51.50 per individual, or $255 for a family of five, then we understand that we must think upon this subject of taxation.

Frederick C. Howe, Director of the People's Institute, said:

"Think of the stupidity of New York citizens. We talk about bankruptcy and lack of city credit and yet we give away each year at least $100,000,000 in the speculative increase of land values which the growth of the community creates. That is, the increase show by the tax valuation of the city. New York could pay a large part of its present budget out of the land speculation profits alone, if it taxed land and exempted buildings."

C. N. Sheehan of the Twenty-eighth Assembly District Board of Trade, Brooklyn, and J. P. Coughlin of the Central Labor Union of Brooklyn also spoke.

June 16, 2012

Dewey Beach — The Town of Dewey Beach [Delaware] is marching to the beat of its own drum: Town officials have imposed a fee of $109 to all bands that play in town. No other town in the Cape Region imposes such a law. “This is just a matter of fairness,” said Mayor Diane Hanson....Hanson said if her cleaning lady has to buy a business license, it is fair to require bands to buy one as well.

Dewey Beach, Delaware, prides itself on not having a property tax. This forces it to rely on taxes which are far less just and less logical than a simple tax on land value would be -- including a licensing fee for anyone who works in Dewey Beach!

And if one lets one's license skip a year, and then needs it again, one must pay for the year one didn't have a customer there, as well as the years in which one does.

Why? Well, perhaps the explanation is partially related to the fact that one company owns an amazing amount of the land in Dewey Beach, and it is rented out on ground leases which are currently at a very low level -- say, $550 to $650 per year -- and whose end comes in about 11 to 14 years. Many of these lots sell for $600,000 or more, when one comes on the market; those in the ocean block perhaps significantly more. The County last assessed the land in the late 1960s. County taxes on the cottages (excluding the land), which typically sell for $200,000 or less because they are aging and must be removed at the end of the lease, run from $300 to $900 a year (and the county tax is mostly for the school district). In neighboring Rehoboth Beach, city taxes typically run about 1/4 of county taxes, though the relationship is not constant because one relies on a 1960s assessment, the other on a 1970s one!!

Dewey Beach collects something each year from property owners to restore the beaches, in case there is erosion that the federal government or state government won't pay to correct, but the beaches were renourished this past winter, at no expense to the property owners. According to an article from a week or two ago, the tax is $0.40 per $100 of assessed value. That article says, "A property in Dewey Beach with an assessed value of $200,000 would pay a total of $240 each year in taxes – $80 for beach replenishment and $160 for capital improvements." But it doesn't seem to realize that the only homes with assessed values of $200,000 are valued by their sellers at over $6 million! $80 is trivial to the owner of those $6 million oceanfront homes.

But to the typical worker in Dewey Beach, the $109 annual license to work within the borders is not so trivial.

Does it make sense to tax workers? Or is there a better tax base than productive activity? What taxes work best? Which taxes do the least damage?

Is working a privilege, or a right? I understand licensing doctors, nurses, lawyers and the like; I don't understand licensing singers, painters, waiters, and other workers.

April 16, 2012

In the ocean-front Delaware town of Rehoboth Beach, seasonal parking fees provide a major revenue source:

In Rehoboth Beach, parking meters -- at $1.50 per hour -- are big business. They bring in $2.58 million for the city's $14.75 million operating budget.

Fines on expired meters add another $667,000, bringing the total to more than $3.2 million. More comes from parking permit fees, fines for parking without a permit and collections from a lot the city operates at the north end of the community. All told, parking is the largest single segment of the city budget.

Meters, some say, are one way the city can capture a revenue stream from the thousands of summer visitors who don't rent a cottage or stay in a hotel room, or who rent accommodations outside the city limits.

City Manager Gregory J. Ferrese said he believes meter and parking permits eliminate the need for beach fees, which are routinely charged in New Jersey resorts.

This is not to say that one can't use the beaches without paying for parking; Resort Transit brings people in by bus from the Coastal Highway, and the Jolly Trolley has been transporting tourists and others from nearby Dewey Beach for many decades.

But parking revenue is a great example of a user fee. One pays for what one takes, and if one doesn't need, one doesn't pay.

A few years ago, the price of parking varied according to location; more recently, they seem to have returned to a one-price-at-all-meters system, which puzzles me a bit. But after late September, the parking meters disappear until late spring, because there usually is plenty of parking to meet the demand.

I seem to recall reading that on-street parking is properly priced if about 15% of spots are available at any particular time. I suspect that that rule of thumb may not hold in RB in season, though I suspect that RB could charge more for ocean-block parking. (I suspect that nearly 100% of RB's parking spots will be occupied during most hours of peak season, at any reasonable price.)

Rehoboth is from the Hebrew for "space for all." One source says "City of Room" "Big City" "Broad Places, Streets" "Streets, Wide Spaces." Interestingly, when Rehoboth Beach was first laid out, by the Methodist diocese of Wilmington, as a camp meeting ground, the streets were designed to be wide and become wider as they approached the ocean, so all could have some view and access.

As a society, how do we create "space for all?" By structures and policies which encourage all of us to take only what we'll use. No land speculation, for example. (Rehoboth Beach fails on this count; its low property tax and use of 30+ year old assessments encourage people to hold onto empty land and unaltered cottages as a low-cost nest-egg; a new home far from the beach may pay far more in taxes than an older one close to it which sells for twice the price). And a 3% tax on transfers -- half to the city, half to the county -- discourages transactions.)

Some of RB's revenue comes from a 3% tax on rental income. I'm intrigued to know that parking brings in more than the tax on rentals.

Delaware, wisely, does not use a sales tax. Rehoboth Beach has 3 large outlet malls just beyond its borders, which attract shoppers from nearby Ocean City, Maryland, and even from southern New Jersey; the latter arrive by ferry for a day of tax-free shopping.

And of course the Federal government is generous with paying for beach replenishment, which helps keep the renters and beachgoers coming, at little or no cost to the property owners in RB.

March 31, 2012

A tax upon ground-rents would not raise the rent of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist and exacts the greatest rent which can be got for the use of the ground.

March 23, 2012

The remarkable thing about this story, to my eye, is that the size of the lot isn't even mentioned! It is worth $1 million land rent per year, and one might infer from the information provided that the lot is about 10,000 square feet, or less than 1/4 acre.

Capitalized at 5% (also known as "20 years' purchase") the lot would sell for about $20 million.

I assume that in addition to the land rent, the tenant pays the property tax on the land. So the entire $1 million annual land rent flows out of NYC, to the property's owner, in Marshall, Virginia.

What, pray tell, has the land owner done to earn that land rent?

Consider how many people's wage taxes and sales taxes could be lifted, and what that additional spending power could do for the local economy. Consider what would happen if there were no taxes to be paid on the apartments or on people's condo structures.

Or NYC can just keep letting the land rent leave the city, and even leave the country, continuing to flow into private pockets, just as if they'd rendered someone some service and earned it!

Land rent is natural public revenue, and we permit landlords to privatize it. Aren't we generous with our patrimony? (Leona told us the truth!)

The developer of a nine-story Karl Fischer rental apartment building planned for a corner site in the East Village signed a 99-year ground lease that requires payments each year of about $1 million.

The development company, YYY Third Avenue, signed the long-term lease for the vacant site at 74-84 Third Avenue, at 12th Street, April 27, 2011, however, a memorandum of the lease was not recorded in public records until last Wednesday, city property documents show.

A source citing city property records said the lease payment, which is not specifically recorded, could be inferred to be about $1 million per year. Prior to the document’s release, the annual lease cost was not known.

The prolific and controversial architect Fischer filed plans to build an 82,000-square-foot, nine-story residential building with 94 units, city Department of Buildings online records show. The permit has not been approved and is pending, DOB data indicate, and is to include nearly 9,511 square feet of retail, as well.

You might also be intrigued by the URL for the story ... I'm not sure what to make of it.

March 04, 2012

This article suggests the folly of taxing personal property, including cars and horses. The setting is Greenwich, CT -- the closest-to-NYC suburb in Connecticut. Greenwich has the largest Grand List of any town or city in Connecticut (neighboring Stamford, with a much larger population, is #2, with a much lower figure).

Greenwich is tear-down land. Houses built before about 1995 tend to get torn down and replaced with the largest house the zoning (floor area ratio and green-space requirements) will permit. It is fair to assume that many who own a home in Greenwich also own homes in other places, and, since most other states do not assess personal property tax on cars (18 states do, including Massachusetts and Maine), many residents register their cars in one of their other states, thereby avoiding the local personal property tax and the higher insurance costs associated with living in a densely populated area.

Personal property taxes have never been a good idea. They tend to catch mostly poor people and mostly rural people; richer people and urban people traditionally have sidestepped them. (Was it Thomas Shearman -- of Shearman and Sterling -- who wrote so eloquently about this? I know Albert Nock wrote a wonderful series -- The Things That Are Caesar's -- and called the first installment, on "personal property" taxes, "A Tax on Ignorance and Honesty" in 1910-11.)

February 27, 2012

27. A new subway line costs $2 billion. Suppose that its construction increases the surrounding land values by $2 billion. (Assume 5 miles long, 10 stations, 0.5 mile radius, average lot size of 0.10 acre. How should the new subway line be financed?

February 22, 2012

The taxation of all property at a uniform rate is made necessary by the constitutions of about three-fourths of the States of the Union. The taxes on chattels, tools, implements, money, credits, etc., find their condemnation from the Single Taxer's point of view in those ethical considerations which differentiate private from public property. Where there arises a fund known as "land values," growing with the growth of the community and the need of public improvements, it is not only impolitic, it is a violation of the rights of property to tax individual earnings for public expenses.

The value of land is the day-to-day product of the presence and communal activity of the people. It is not a creation of the title-holder and should not be placed in the category of property. If population deserts a town or portions of a town, the value of land will fall; the land may become unsalable. When treated as private property the owner of land receives from day-to-day in ground rent a gift from the community; and justice requires that he should pay taxes to the community proportionate to that gift.

"Land value" or "ground rent" as the older economists termed it, is a tribute which economic law levies upon every occupant of land, however fleeting his stay, as the market price of all the advantages, natural and social, appertaining to that land, including necessarily his just share of the cost of government.

February 21, 2012

21. The creation of a new subway line raises the land values near each of the stations. Who should pay for the building of the subway line?

A. Riders of the new subway line

B. Riders of all subways in the system.

C. Riders of all mass transit in the metro area.

D. Drivers of cars and trucks, all over the metro area, via taxes on their fuel purchases (that is, in proportion to miles driven and the fuel efficiency of their vehicles)

E. Drivers of cars and trucks, all over the metro area, via an annual surcharge on their registration

F. Drivers of cars and trucks, all over the metro area, in proportion to the value of their cars, owned or leased

G. Drivers of cars and trucks, via tolls when they use bridges and tunnels, or HOV lanes, or certain highways

G. The taxpayers, via increased sales taxes on their purchases

H. The tourists and business travelers, via hotel occupancy taxes and taxes on rental cars.

I. Passengers in taxis, via a surcharge on their fares.

J. The homeowners, via taxes on their homes

K. Drivers, commercial and individual, via taxes on fuel purchased within the city

L. Employees all over the metro area, via a payroll tax

M. The tenants of commercial buildings in the heart of the central business district

N. All landholders, paying equally (a parcel tax)

O. All landholders, in proportion to the size of their lots

P. Landholders, in proportion to the value of the land they hold, without regard to the buildings or their contents. Those whose land values are raised by their proximity to the new line will see a proportional increase in their share of the tax burden; those far from the new line will not.

February 20, 2012

20. What is the best way to insure that affordable housing -- for people of all ages and stages, all income levels -- is available, both for ownership and for rental, both near the center of activities and, if needed after the desire for housing near the center of activities is satisfied, on the fringes?

A. Lotteries

B. Community Land Trusts

C. Affordable Housing Regulations that require that for every 10 new condos built, 1 must be affordable to people earning less than the local median household income

D. Rent control

E. Shame

F. Fundraisers

G. Habitat for Humanity

H. Relaxed mortgage lending rules and more private mortgage insurance

I. Land value taxation, to encourage the redevelopment of underused sites near the center of things

February 19, 2012

19. Storms continue to erode the resort beaches up and down our coasts. Who should pay for beach restoration every few years?

A. The federal government, from income tax revenues. (why?)

B. Taxes on pollution should be used to pay for this, on the basis that pollution produces the climatic conditions that make storms slower moving and more destructive.

C. State governments along the coasts.

D. Local governments, town by town, paid for by sales taxes.

E. County governments along the coasts.

F. Local governments, town by town, paid for by taxing wages.

G. Local governments, town by town, paid for by summer parking revenue, hotel bill taxes and taxes on rental properties' revenue;

H. Local governments, town by town, paid for by property taxes, taxing both buildings and land, in proportion to current market value

I. Local governments, town by town, paid for by land value taxation. Land values close to the beaches rise and fall with the sand, and properties further from the beaches are far less effected by the presence/absence of beach sand than those near the beaches.

J. Local governments, town by town, paid for by transfer taxes on sold properties, so as not to burden long-time owners who aren't selling.

February 16, 2012

I came across this rather good letter to the editor, from 1938. (Trinity Church Corporation, a major landlord in downtown Manhattan, was the subject of a NYT article this past week, as well as the subject of a major series in the NYT in December, 1894):

1938-09-03 Letters to The Times

Collecting Ground Rent Single-Tax System Regarded as No Detriment to Building

TO THE EDITOR OF THE NEW YORK TIMES:

Fabian Franklin, in his letter to THE TIMES discussing the demolition of John D. Rockefeller's Harlem tenements in order to save taxes, writes:

"That objection is simply that virtual abolition of land ownership, which the single-tax plan is designed to effect, would make the building of houses in a city an extra-hazardous business, because, under the single-tax regime, in the great majority of cases the investment would result in a disastrous loss to the owner of the building. I was neither blaming nor praising Mr. Rockefeller for the demolition of Harlem tenements."

What is the so-called single-tax system? It is the collection by the government, through the taxing officials, of the entire economic or ground rent of land and the repeal of all taxes on buildings and other products of labor and capital. That ground rent is estimated to be 9% of the capital value of the land. New York City is now collecting one-third of this ground rent. The market value of the lots is the remaining two-thirds, capitalized. Dr. Franklin's thesis is that if the entire ground rent is collected no one would erect buildings, because "in the great majority of cases the investment would result in a disastrous loss to the owner of the building."

Some of the finest buildings in New York City are erected on leased land and the lessee pays the ground rent 100% besides a tax on the building. There are hundreds of buildings erected by lessees of lots owned by Trinity Church, Astor estate, Rhinelander estate, Sailors Snug Harbor and others. The lessees must pay all the taxes, both on land and building, amounting to 3% of the assessed value of both, and to the landlord 6% of the market value of the land.

Thus the entire ground rent is paid by the lessee, but only one-third to the government representing the people who made that value by their presence and activities, the remaining two-thirds to the landlord. Notwithstanding that they are thus obliged to pay 100% of the economic rent, bankers and business men erect buildings costing millions. Under the Henry George plan they would have to pay less, for the taxes on these costly structures will have been repealed.

Perhaps if Mr. Rockefeller had not been obliged to pay taxes on the buildings he might not have pulled them down; or, if he had, would have erected better buildings in their place in order to get a return on his investment in buildings. The ones who will benefit most from the adoption of the Georgian philosophy are the owners of humble homes. The average small homeowner's house is assessed for at least twice the assessed value of the lot. If the house is relieved from taxation and the lot taxed the entire ground rent, his tax will be less than it is now. The difference will be made up from vacant lots and lots that are worth more than the improvements.

After all, the building of houses is like any other business. The builder takes the risk of lessened demand because of changes in fashion, obsolescence, competition. It is estimated that 95% of new businesses ultimately fail. With the adoption, however, of the philosophy of Henry George, commonly called the single tax, failures in the housing and other businesses will be much fewer. This is because neither houses nor goods nor anything else will be taxed. The collection of the entire ground rent will not lessen the area of the surface of the earth one inch. On the contrary, it will open to occupation and use land that is now held for speculation purposes.

The taxation of any product of labor and capital will add the amount of the tax to the price, lessen demand and thus curtail production. The result is unemployment and misery.

1. Land Supply Constraints in the United States Excerpt from the Final Report of the Task Force on Housing Costs, William J. White, Chairman

2. The High Price of Land by P. I. Prentice, Chairman, National Council for Property Tax Reform

3. Modernize, Don't Abolish, the Property Tax From a report by the Subcommittee on the City of the House Committee on Banking, Finance, and Urban Affairs of the U. S. House of Representatives, Rep. Henry S. Reuss, Wisconsin, Chairman

Introduction by Dr. C. Lowell Harriss

The number of Americans who lack adequate housing is much too high. While both opportunity and promise life in the long-established principle of providing satisfactory shelter for everyone, many are still not well housed. Population grows, and the existing stock of housing grows older. For years to come, much new construction, expansion, and modernization will be needed.

Rapidly rising costs, however, present formidable obstacles. One of the heaviest costs is one which also rises most rapidly. And it is the cost of something created not by sweat and thrift, but by nature.

It is land.

The rising prices paid for land itself must be distinguished from the portion of the price of a building site which represents cost of preparation for use. The land elements alone go up and up in price. But land price increases do not change the quantity of land in existence. Here is a rising price which does not add to supply.

Land is different.

In these three articles on land value taxation, the first, "Land Supply Constraints in the United States," points out that the sharp rises in land prices result in part from man-made factors. Arbitrary, artificial, and unconstructive restrictions on land supply boost prices and threaten our housing future. New building will therefore be kept below levels which unfettered economic conditions would otherwise achieve. But tax policy which would encourage use, rather than underuse and withholding of land can increase the effective supply. Need more be said?

Yes. And in the second selection, "The High Price of Land," Mr. Prentice says more. He points to many avenues by which the harmful effects of restricted land supply spread through the economy. Developers and builders, laborers, supplier, subcontractors, and others all suffer. They have less work, operate under conditions of disadvantage, and receive poorer rewards because of essentially needless obstructions to the optimum use of land. The full and true price of land includes burdens above and beyond the dollar prices of building lots. We shoulder burdens of lost opportunity of many kinds. They are largely hidden but indeed real. The quality of too much new construction deteriorates instead of improving as an advancing society should expect. And, to repeat, the tragedy is that the rising prices for land do not create an more surface on the earth.

What to do? The third article, "Modernize, Don't Abolish, The Property Tax," points to the reform outlined generations ago but here presented in modern form: reduce the property tax burdens on structures and make up the revenue by higher tax rates on land value.

The benefits from relying more fully on taxation of land values, rather than taxation of buildings, would include greater pressure on landowners to put land to better use. Withholding land -- which reduces the current effective supply -- would become more costly if land value taxes were higher. Thus some land formerly held for speculation would be sold, and new building would be encouraged on the increased supply of land.

A careful study of probable results in Washington, D. C., showed, among other things, that taxes on present homeowners would generally fall. But this result is not the one which most justifies support for reform. More significant and constructive would be a combination of forces producing incentives for better land use. Upgrading of housing in older urban centers would be expected. Positive incentives at many points would contribute to improving America's housing.

January 22, 2012

In the files I've been digging through, from the late 50s to the early 80s, I found an early draft of a fine paper by Mason Gaffney about California's Proposition 13, for presentation at an August, 1978 conference. I dug around and found a published copy of that paper, and think it worth sharing here. Original title, "Tax Limitation: Proposition 13 and Its Alternatives"

First, a few of my favorite paragraphs, which I hope will whet your appetite for the whole paper. I won't attempt to provide the context (you can pick that up when you continue to the paper, below).

"There is a deferment option for the elderly, bearing only 7% interest (which is about the annual rate of inflation). In California, as also in Oregon and British Columbia, hardly anyone takes advantage of this deferment option. This fact, it seems to me, rather calls the bluff of those who so freely allege that the woods are full of widows with insoluble cash-flow problems, widows who are losing their houses to the sheriff and whose heirs presumptive, will not help keep the property, which they will eventually inherit."

We hear a lot these days about cutting the fat out of the public sector; but there is fat in the private sector too. I interpret "fat" to mean paying someone for doing nothing, or for doing nothing useful. Most economists agree that payments to people. for holding title to land is nonfunctional income, since the land was created by nature, secured by the nation's armed forces, improved by public spending, and enhanced by the progress of society. "Economic rent" is the economist's term, but in Jarvis-talk we may call it the fat of the land or "land-fat." It has also been called unearned increment, unjust enrichment, and other unflattering names. Howard Jarvis has said that the policeman or fireman who risks his life protecting the property of others has his "nose in the public trough." But it has seemed to generations of economists that the owner whose land rises in value because public spending builds an 8-lane freeway from, let us say, Anaheim to Riverside, and carries water from the Feather River to San Diego, is the first to have his nose in the trough. Nineteenth-century English economists who worked this out were more decorous. They said things like "landlords grow rich in their sleep" (John Stuart Mill), or the value of land is a "public value" (Alfred Marshall) because the public, not the owner, gives it value.

Some 43% of the value of taxable real estate in California is land value. When we lower the property tax we are untaxing not only buildings, but also land-fat.

The ownership of property is highly concentrated, much more so than the receipt of income. Economists in recent years are increasingly saying that the property tax is, after all, progressive because the base is so concentrated, and because so little of it can be shifted. But this message has not yet reached many traditional political action groups who continue to repeat the old refrains. Two remedies are in order.

One is to collect and publish data on the concentration of ownership of real estate. The facts are simply overwhelming and need only to be disseminated.

The second remedy is to note how strikingly little of the Proposition 13 dividend is being passed on to renters. This corroborates the belief of economists that the property tax rests mainly on the property owner where it originally falls, and not on the renter.

A high percentage of real property is owned from out of state and even out of the country. The percentage is much higher than we may think. It is not just Japanese banks and the Arabs in Beverly Hills. It is corporate-held property which comprises almost half the real estate tax base. If we assume that California's share of the stockholders equals California's share of the national population, then 90% of this property is absentee-owned; the percentage may be higher because many of these, after all, are multinational corporations with multinational ownership.

No one seems to have seized on the fact that half the taxable property in California is owned by people not voting in the state. Senator Russell Long has suggested the following principle of taxation: "Don't tax you, don't tax me, tax that man behind the tree." Property tax advocates have done well in the past and should do well again in the future when they make their slogan: "Don't tax you, don't tax me, tax that unregistered absentee. Don't tax your voters, they'll retaliate; tax those stiffs from out of state." Chauvinism and localism can be ugly and counterproductive, as we know; but here is one instance where they may be harnessed to help create a more healthy society. The purpose of democracy is to represent the electorate, not the absentee who stands between the resident and the resources of his homeland.

California's legislative analyst, William Hamm, estimates that over 50% of the value of taxable property in California is absentee-owned. This is such a bold, bare, and enormous fact it is hard to believe that Californians will long resist the urge to levy taxes on all this foreign wealth. They may be put off by the argument that they need to attract outside capital, but that carries no weight when considering the large percentage of this property which is land value.

Property income is generally more beneficial to the receiver than is the same income from wages or salaries, because the property owner does not have to work for it.

Property, particularly land, has been bought and sold for years on the understanding that it was encumbered with peculiar social obligations. These are, in effect, part of our social contract. They compensate those who have been left out. Black activists have laid great stress in recent years on the importance of getting a few people into medical and other professional schools. Does it not make more sense that the landless black people should have, through the property tax, the benefit of some equity in the nation's land from which their ancestors were excluded while others were cornering the supply?

A popular theme these last few years is that property owners should pay only for services to property, narrowly construed. Who, then, is to pay for welfare — the cripples? Who is to pay for schooling — the children? Who should sacrifice for the blacks — Allan Bakke? Who should finance our national defense — unpaid conscripts? The concept that one privileged group of takers can exempt itself from the giving obligations of life denies that we are a society at all.

Here is, perhaps, my favorite:

We can ask that a single standard be applied to owners troubled by higher taxes and to tenants troubled by higher rents. When widow A is in tax trouble, it is time to turn to hearts and flowers, forebode darkly, curse oppressive government, and demand tax relief. When widow B has trouble with escalating rents, that touches a different button. You have to be realistic about welfare bums who play on your sympathy so they can tie up valuable property. You have to pay the bank, after all. A man will grit his teeth and do what he must: garnishee her welfare check. If that is too little, give notice. Finally, you can call the sheriff and go to the beach until it's over. That's what we pay taxes for. Welfare is their problem.

Anyway, widow B is not being forced out of her own house, like widow A and so many like her. Jarvis said that taxes are forcing three million Californians from their homes this year. But in truth, while evictions of tenants are frequent, sheriff's sales of homes are rare. Those who do sell ("because of taxes," they say, as well as all their other circumstances) usually cash out handsomely, which is, after all, why their taxes had gone up.

Then there is the fruit tree anomaly. Under Proposition 13, a tree can only be assessed at its value when planted, with a 2% annual increment. The value of a seed thrown in the ground or even a sapling planted from nursery stock is so small compared with the mature tree that this is virtual exemption. This anomaly rather graphically illustrates how Proposition 13 automatically favors any appreciating property over depreciating property. The greatest gain here goes, of course, to appreciating land.

Finally, build no surpluses. Surpluses attract raiders and raiders are often organized landowners. "Property never sleeps," said the jurist Sir William Blackstone. "One eye is always open." Even though the surplus was built up by taxing income, Howard Jarvis made it seem the most righteous thing in the world that it should be distributed to property owners. He was geared up for this because his landlord patrons kept him constantly in the field.

Economists of many generations even before Adam Smith and continuing to the present — have preached on the advantages of land as a tax base. Let me enumerate a few of those.

A tax on land value is the only tax known to man which is both progressive and favorable to incentives. One can wax lyrical only about a tax that combines these two properties, because the conflict between progressivity and incentives has baffled tax practitioners for centuries, and still baffles them today.

A land tax is progressive because the ownership of the base is highly concentrated, much more so than income and even more so than the ownership of machines and improvements.

Also, the tax on land values cannot be shifted to the consumer. The tax stimulates effort and investment because it is a fixed charge based merely on the passage of time.

It does not rise when people work harder or invest money in improvements. Think about this. It is remarkable. With the land tax, there is no conflict but only harmony between progressivity in taxation and incentives to work and invest. In one stroke it solves one of the central divisive conflicts of all time.

The land tax does that because it cuts only the fat, not the muscle. It takes from the taxpayer only "economic rent," only the income he gets for doing nothing. If people could grasp this one overriding idea, then the whole sterile, counterproductive, endless impasse between conservatives who favor incentives and liberals who favor welfare would be resolved in a trice, and we could get on to higher things.

The final paragraphs speak directly to us in 2012. 34 years have passed since this was written.

Summing up, Walter Rybeck, an administrative assistant for Congressman Henry Reuss of Wisconsin, and head of the League for Urban Land Conservation, has sagely suggested that we distinguish two functions of business: wealth-creating and resource-holding. A good tax system will not make people pay for creating wealth but simply for holding resources. Most taxes wait on a "taxable event" — they shoot anything that moves, while sparing those who just sit still on their resources.

If we really want to revive the work ethic and put the United States back on its feet, we had better take steps to change the effect of taxes on incentives. Legislatures have got in the habit of acting as though persons with energy and talent, and with character for self-denial, should be punished, as if guilty of some crime against humanity. We cannot study the tax laws without inferring that Congress regards giving and receiving employment to be some kind of social evil, like liquor and tobacco, to be taxed and discouraged by all means not inconsistent with the rights of property. Little wonder the natives are getting restless. If we tax people for holding resources rather than creating wealth and serving each others' needs, we will be taking a giant step toward a good and healthy society.

If your appetite is whetted by these excerpts, you can read the entire article below:

It is frequently pointed out by Georgists that there are no really good rebuttals to land value taxation.

This excerpt from a 1971 letter to my grandfather from a colleague describes where the opposition comes from:

There may be be no "arguments that actually oppose LVT" as Bill says, but there are plenty of people who not only actually but actively oppose it. These are the people who are making hundreds of millions of dollars a year on the unearned increments land speculation gets as a result of land being so undertaxed that the landowner puts up only a trifling share of the enormous community investment needed to make his land reachable, livable and readily saleable. Of 7 million-odd New Yorkers I would guess that perhaps 70,000 people profit by today's misapplication of the property tax while 7 million lose by it, but the problem is that the 7 million have no idea of what they are losing while the 70,000 jolly well know that they have a good thing going for them and fight to keep it.

I've been trying for a year to get my friend, J___ C___, past president of the Realtors and Chairman of the Realtors Economic Research Committee to stop fighting LVT, but he keeps coming back to how his father bought some land near San Diego for $20 an acre before 1900 and sold it for $4,000 an acre around 1950 and his father could not have held it all that time if he had had to pay more than a nominal tax.

I don't think anyone should take the equity argument seriously. Just because the ownership of underused land has been subsidized for years does not entitle its owners to expect the subsidy to be continued forever, and likewise, for those who bought land in the expectation that the subsidy would be permanent. The equity objection to increasing the tax on land would apply almost equally to any other tax increase.

A week later, another letter includes this:

Just because landowners have had a wonderful subsidy racket going for them in the past should not give them any claim on having that subsidy continue ad infinitum. I do agree with Lowell that the transition to LVT would raise problems, and in any area with a high tax rat on property I can see that the transition would have to be staggered over a period of years, probably not less than five or more than ten, dpending on how big a tax rate was to be shifted off improvement values onto location values.

In the same file, a copy of a 1969 letter from the same person to Lowell (Harriss):

I don't see how tripling the tax on land could fail to force almost all owners of underused land to get busy and put it to better use. Conversely, I don't see how taking the equivalent of a 51% sales tax off improvements could fail to be a tremendous stimulant to improvements. If a 7% Federal tax credit on improvements was so effective, what would wiping out a 50% tax do!

January 08, 2012

Going through some old files, I came across a letter to the editor written by my late grandfather which was published in the WS J. It seems to be from late 1978. Think about California's Proposition 13 in light of its observations:

Alfred Malabre's perceptive portrayal on the back page of your issue of Dec. 1 of Arthur Laffer's Tax Yield Curve and the theory he derives therefrom unfortunately has the same defect as the theory and its admirers and most of its critics. All these generalize, as though taxes were all alike. But that is just not so.

Laffer's curve tells us that at rates of 0% and 100% the yield of taxes will be zero, the maximum yield falling somewhere between these two extremes.

This may hold in the case of the income tax, although the zero point on the top side would probably be well below 100%. It is certainly not the case with excises, where, for instance, in India in the 1870s, the tax on salt almost reached 1,200%.

Nor, at the other extreme, does it hold for the property tax, where a low annual cap on the building will, over time, capture a sum whose discounted present value will be a high percentage of that present value, and where the same low rate, applied to rental property, may amount to an alarming percentage of its before-tax income.

But the most striking failure of all these theorists is their failure to analyze and describe the workings of the other part of the property tax, the part that falls on land values.

All taxes on labor and its products are harmful because they lessen incentive and, by adding to the costs of production, they lessen supply and raise prices. Likewise they are unjust as they infringe on the rightful earnings of labor and capital.

Conversely, taxes on land values are just, for land values are but the capitalization of the annual benefits from the community, net of the tax, enhanced by the expectation of future gains from the artificial scarcity created by speculation on the possibility of that rise in price of a factor, the supply of which cannot be increased by production. Moreover, the tax on land values is the only tax that encourages, that stimulates, that compels production and does that in direct proportion to the magnitude of its rate. As one of the top two economists selected for special honor by the American Economic Association at its annual meeting, held in Chicago this past August, has said: "We will never have an economically efficient economy until we have recovered in taxation at least 85% of the rent of land." (In a 5% money market, this would be achieved by a tax rate of 28.33%; in a 10% market, by a 56.7% rate on the actual market value of the land.)

It is understandable that political animals like Gov. Brown and Sen. Long should seek counsel of Laffer. The mystery is why competent economists waste their time in such distractions, instead of turning their attention to the exciting and construction potentials inherent in the study of the economics of land value taxation, especially in these times of fiscal and monetary crises.

Somehow I am reminded of the old shell game, practiced at country fairs, where the pea was under one of three shells and the facile operator moved the shells about with such dexterity that the wagering onlooker rarely could tell which shell finally held the pea. Alas! In the ongoing controversy of fiscal vs. monetary policy, there is no third shell for land value taxation. It is not even in the game!

Many Greeks consider the new tax, which makes no exceptions for the unemployed or the elderly and is much higher than any real estate tax they have paid before, to be one more sign of the tough austerity measures they are suffering under as a requirement for European aid. European finance ministers will meet Tuesday to decide whether to release the next $10.6 billion allotment to the Greek government.

In the past, most Greeks paid real estate taxes when they bought, sold or inherited property. They also paid comparatively small yearly taxes to municipalities. Someone in Mr. Chatzis’s circumstances might have paid less than $133 a year in total. Now he will have to pay an additional $373 this year and the next.

In September, under pressure to come up with $2.6 billion to close a budget gap, and losing the battle against tax cheats, Greek officials settled on the idea of linking a new real estate tax to bills from the government-owned power company.

The new tax, which they say they will levy again next year, is based on square footage, the age of the building and the average value of a neighborhood, and has nothing to do with the taxpayer’s income.

and

“We have to help the state,” he said. “The tax is unfair. We are not the first ones who should be paying. The ones who have Swiss bank accounts should be paying. But that is still how things are here.”

The Greek government has struggled to improve tax collection. At first, officials were optimistic that they could capture at least a portion of an estimated $27 billion in unpaid taxes each year.

Various experts have put Greece’s shadow economy at about 25 percent of its gross domestic product, compared with less than 8 percent for the United States.

But last year, Greek officials collected even less than the year before. Some of the decline in revenues resulted from the decline in the economy. But some new tax collection strategies — incentives to collect receipts so that fewer business could work off the books, for instance — backfired and actually reduced people’s tax bills.

And the state seemed to make little progress in getting the scofflaws to pay. Some 70 percent of the tax collected came from salaried employees and retirees, who have little way to hide their income. Meanwhile, 7 out of 10 self-employed workers, including doctors, dentists, engineers, accountants, taxi drivers and small business owners, indicated on their tax forms that they had made less than $16,000 a year, a figure that most experts find laughable.

The first quoted section might lead one to note that the new property tax falls on those who own buildings, and lightly or not at all on those who own vacant land or parking lots, or garden plots within the city limits!

The second section points out a number of the problems with trying to tax income.

So what should Greece do? Place its primary tax on its land value. Collect it month in and month out, not just from electric utility customers, but from every landholder, according to the value of their holdings. Value the land well, and leave the buildings and other improvements out of the equation completely.

October 02, 2011

This blog-like page contains an interesting economic indicator: despite a tepid economic environment for most home construction, the pace of teardowns in Westport, Fairfield County, Connecticut, seems to be steady to rising.

Westport sits on Long Island Sound, and has a reputation for excellent public schools and good express trains to midtown Manhattan. ($308 for a monthly pass -- 44 miles, about 67 minutes; $5 per day for day parking -- 300 spots -- but a 4 to 5 year wait for one of 1800 parking stickers -- $325/year.)

Many of the entries show recent transaction prices, which readers of this site will know are clearly simply for land value.

It would be interesting to know what the bank appraisals on these properties would show, in terms of the value of the houses and the value of the land itself -- assuming that the buyers needed to take out mortgages.

And it would also be interesting to know how Westport's assessor values these properties, and what adjustments take place in neighborhood land values as the evidence of most of the value being in the land accumulates.

And it turns out that Westport's assessments are online. So let's look at the newest teardown, posted 10/1/2011:

This was the aftermath of the demolition this week of 3 Great Marsh Road in the Saugatuck Shores across from the entrance to the Saugatuck Harbor Yacht Club, Built in 1934, the 1 1/2-story conventional-style house had 1,701 square feet, was situated on a 1.11-acre property and changed ownership in August 2011 for $1,136,174

The assessor's database shows an "appraised" value of $249,800 for the buildings, and $696,400 for the land, or a total of $946,200. (This is the supposed "market value" of the land at the date the valuation was done, October 1, 2010. By Connecticut law, assessed value is 70% of that market value. Peculiar law; one wonders whose interests it was designed to serve.)

The Assessor’s primary responsibility is to find the “full and fair cash value” of your property so that the taxpayer may pay only his/her fair share of taxes.

The record also shows that the property sold in August 2010 for $1,000,000. The previous transaction was in 1973, which suggests that it might have been an estate situation. But 14% appreciation in 12 months is pretty sweet these days.

So that 1.11 acres sold for $1,136,174 in August, 2011, and then the buyer paid an additional amount for the removal of the 1700 square foot building -- say, $10 psf? That's $17,000, for a total of about $1,150,000. And the assessor says the land is worth $$696,400.

And that $250,000 square foot house? Over valued by quite a bit.

The 2010 tax rate for Westport was $14.85 per $1000 of value. (I couldn't find the 2011 figure, but it was expected to be 15% higher.) That's based on the 70% value, which for this property was $662,400. So the 2010 property tax was $10,300.

$10,300 as a percentage of the transaction price, $1,136,174, is 0.91%.

Clearly the town is well run, and people want to live there. They're willing to pay $1.1 million for a lot. And even in these times, financially difficult for many people, there are people who can afford to pay $1.1 million and more for a bit of land on which to live.

How much of the value of these lots comes from excellent schools and good municipal services, and how much from the existence of Metro North, of I-95 and the Merritt Parkway, the presence of Long Island Sound, and the presence of NYC? And how much comes from the presence of hedge funds and other high-paying employers which are skimming the cream from the productive economy and pocketing that value, because we let them do so?

September 26, 2011

Re “Poverty Rate Soars to Highest Level Since 1993” (front page, Sept. 14): I know this is heresy, but why don’t we increase taxes on the wealthy and spend this money on infrastructure projects to put unemployed people to work?

Just asking.

ROBIN LEVIN San Francisco, Sept. 14, 2011

And consider what would happen: the infrastructure projects would increase the value of the land served by them, and make things work better in those communities, as reliable streets and bridges and other worthwhile projects do.

Who owns that land? Is it local folks, who one might hope would spend their infrastructure-created windfall locally (but who might simply use it to buy additional land, benefiting the seller, be he absentee, local, corporate, whatever)? Is it REITs? Sovereign wealth funds?

Now suppose that instead of leaving all that infrastructure-created wealth in the pockets of the landowners, local communities wised up and collected some significant fraction of it (without raising taxes on buildings in the process: the really wise communities would take this opportunity to reduce or eliminate the taxes on the buildings!) for public purposes. What do you think would happen?

I suspect that the vacant lots in town would soon start to disappear. They wouldn't leave town. They'd get built on, when their carrying costs as vacant lots rose and the disincentive to build was decreased or eliminated. That would create jobs.

Depending on what the market wanted, it would also create housing, and creating housing also leads to creating jobs to service those homes -- plumbers, electricians, painters, home improvement of various kinds.

But it might not be the high-end housing we're used to seeing; not McMansions, but more modest homes. Not luxury condos but housing for people of all ages and stages, and not just for the highest-income people but for people of more modest means.

Sounds like a virtuous circle to me. Natural Public Revenue.

But if you like the current approach, by all means tell us why we should stick with it. (California's Prop 13 is an extreme case of suppressing this wise form of taxation. Look where it has gotten them!)

September 24, 2011

Some would say that they are. But I think there might be a false assumption in there -- one which comes from an unexamined assumption.

When a public sector job is funded via a tax on wages, or a tax on sales, or a tax on buildings -- things which are produced by human effort -- there is a burden to the economy.

Employers must pay far more than their employees receive in wages and benefits;

purchasers must pay more for goods than the producers (including those in the distribution chain -- distribution is part of production) receive;

owners of buildings and other improvements must pay an annual penalty in proportion to the value of those improvements.

All these taxes reduce the demand for what is taxed: work, goods (and, in some places, services), buildings. Fewer jobs are created, fewer goods produced, fewer buildings built and maintained well, less expensive technologies are favored over more expensive ones.

And these are the taxes most of us think about when we think about how to finance public goods.

But suppose we got ourselves outside the smallish box of taxes we're used to thinking about -- those advocated by the neo-classical economists -- and looked more closely at the wisdom of the classical economists -- Adam Smith, David Ricardo, John Stuart Mill, Henry George.

Suppose we thought about the effect of our public spending: effective public spending on goods and services that people value increases land value.

Good schools. Paved streets. Well-maintained streets. Lit streets. Plowed and cleaned streets. City water. Sanitary sewers. Stormwater runoff. Police, with well-equipped cars. Fire departments, with trained professionals and the best of equipment. Ambulances (ditto). Hospitals with life-saving equipment and professionals. Other public-health services. Courts and jails. Libraries. Public health services. Social services. Parks. Playgrounds. Highways (ideally with maintenance taking place at night or at least not during rush hour). Bridges, well-maintained. Buses, subways, railroads (passenger and freight). Airports. Beaches. Utilities (more commonly owned by shareholders, but quite realistically municipally provided). Preschools. Community colleges. Colleges and universities. Perhaps after-school activities for children. A social safety net. This list is incomplete, but each item on it is a fair example of what makes communities good places to live and worth paying to live in and conduct business in.

The presence of each of these things increases land values within the area served. It increases what landlords can charge tenants; it increases what houses and commercial buildings will sell for, without the building owner improving the building or providing additional services.

So does it make any sense to finance these things via taxes on wages? On sales? On buildings? On imports? On personal possessions? On cars? On trucks and business equipment? On business inventory? None of these things are increased in value by the provision of public services and goods.

What increases in value is land -- as everyone can chant, the three most important things in real estate are location, location and location! Much of that is the availability of publicly-funded services. (The rest can be attributed to the presence of the community -- drawn in large part by those services, but also by the beauties of nature, the harbors and rivers, the climate, other favorable conditions; to opportunities seen by entrepreneurs and nonprofits to provide commercial ventures and cultural amenities; to advances in technology and science such as air conditioning, mosquito control, fiberglass pleasure boats, etc.)

How can raising taxes put more money in your pocket? By increasing efficiency.

This year we paid $210 in higher property taxes to finance trash collection and sidewalk snowplowing. Purchased retail, those services would cost about $600. So we spent $210 to save $390. That translates into a savings of $1.86 for every dollar of increased tax. As an added bonus we have just one garbage truck a week down our street, not a different company’s truck everyday, and garbage cans on the street only on Thursday mornings.

What matters in public finance is not how much government spends, so much as what it buys with our tax dollars. But don’t count on the new “Super Congress 12″ committee to undertake serious cost-benefit analysis because cutting spending has become dogma and reality-based policies would be economic heresy.

I don't think DCJ has yet seen the cat, but he's certainly recognizing whiskers.

Would you be willing to pay $210 more in property taxes each year to have these services delivered to you by your community? I'd guess that you might be very willing to pay $210 more in property taxes AND be willing to pay the seller -- and for 30 or 15 years, a mortgage lender -- more for the privilege of living in a place where these things are provided by the community, rather than just outside of town. (If we paid for this via a tax on land value, the selling price wouldn't rise; and the cost of living would be held down. If we pay for it by taxing wages, or sales, or buildings, we do burden the economy, just as the "small government" people tell us. But they don't seem to consider the possibility of taxes which don't burden the economy.)

There are some who would complain that private trash collectors and the people who specialize in shoveling the sidewalks ought not to have competition from the public sector. They should all live in communities which feel this way. And they might concede that others might choose to live in communities which provide these amenities efficiently, with people paid from the public treasury.

1 Thy Kingdom come, O Lord, Wide circling as the sun; Fulfill of old Thy Word And make the nations one.

2 One in the bond of peace, The service glad and free Of truth and righteousness, Of love and equity.

3 Speed, speed the longed for time Foretold by raptured seers— The prophecy sublime, The hope of all the years.

4 Till rise at last, to span Its firm foundations broad, The commonwealth of man, The city of our God.

Henry George delivered a sermon entitled "Thy Kingdom Come," in 1889 in Glasgow, Scotland. Most likely he gave that speech many more times in other places. It includes these paragraphs:

Nothing is clearer than that if we are all children of the universal Father, we are all entitled to the use of His bounty. No one dare deny that proposition. But the people who set their faces against its carrying out say, virtually: “Oh, yes! that is true; but it is impracticable to carry it into effect!” Just think of what this means. This is God’s world, and yet such people say that it is a world in which God’s justice, God’s will, cannot be carried into effect. What a monstrous absurdity, what a monstrous blasphemy!

If the loving God does reign, if His laws are the laws not merely of the physical, but of the moral universe, there must be a way of carrying His will into effect, there must be a way of doing equal justice to all of His creatures.

There is. The people who deny that there is any practical way of carrying into effect the perception that all human beings are equally children of the Creator shut their eyes to the plain and obvious way. It is, of course, impossible in a civilization like this of ours to divide land up into equal pieces. Such a system might have done in a primitive state of society. We have progressed in civilization beyond such rude devices, but we have not, nor can we, progress beyond God’s providence.

There is a way of securing the equal rights of all, not by dividing land up into equal pieces, but by taking for the use of all that value which attaches to land, not as the result of individual labor upon it, but as the result of the increase in population, and the improvement of society. In that way everyone would be equally interested in the land of one’s native country. Here is the simple way. It is a way that impresses the person who really sees its beauty with a more vivid idea of the beneficence of the providence of the All-Father than, it seems to me, does anything else.

One cannot look, it seems to me, through nature — whether one looks at the stars through a telescope, or have the microscope reveal to one those worlds that we find in drops of water. Whether one considers the human frame, the adjustments of the animal kingdom, or any department of physical nature, one must see that there has been a contriver and adjuster, that there has been an intent. So strong is that feeling, so natural is it to our minds, that even people who deny the Creative Intelligence are forced, in spite of themselves, to talk of intent; the claws on one animal were intended, we say, to climb with, the fins of another to propel it through the water.

Yet, while in looking through the laws of physical nature, we find intelligence we do not so clearly findbeneficence. But in the great social fact that as population increases, and improvements are made, and men progress in civilization, the one thing that rises everywhere in value is land, and in this we may see a proof of the beneficence of the Creator.

Why, consider what it means! It means that the social laws are adapted to progressive humanity! In a rude state of society where there is no need for common expenditure, there is no value attaching to land. The only value which attaches there is to things produced by labor. But as civilization goes on, as a division of labor takes place, as people come into centers, so do the common wants increase, and so does the necessity for public revenue arise. And so in that value which attaches to land, not by reason of anything the individual does, but by reason of the growth of the community, is a provision intended — we may safely say intended — to meet that social want.

Just as society grows, so do the common needs grow, and so grows this value attaching to land — the provided fund from which they can be supplied. Here is a value that may be taken, without impairing the right of property, without taking anything from the producer, without lessening the natural rewards of industry and thrift. Nay, here is a value that must be taken if we would prevent the most monstrous of all monopolies. What does all this mean? It means that in the creative plan, the natural advance in civilization is an advance to a greater and greater equality instead of to a more and more monstrous inequality.

“Thy kingdom come!” It may be that we shall never see it. But to those people who realise that it may come, to those who realize that it is given to them to work for the coming of God’s kingdom on earth, there is for them, though they never see that kingdom here, an exceedingly great reward — the reward of feeling that they, little and insignificant though they may be, are doing something to help the coming of that kingdom, doing something on the side of that Good Power that shows all through the universe, doing something to tear this world from the devil’s grasp and make it the kingdom of righteousness.

Aye, and though it should never come, yet those who struggle for it know in the depths of their hearts that it must exist somewhere — they know that, somewhere, sometime, those who strive their best for the coming of the kingdom will be welcomed into the kingdom, and that to them, even to them, sometime, somewhere, the King shall say: “Well done, thou good and faithful servant, enter thou into the joy of thy Lord.”

I wonder if Henry George's words helped inspired Frederick Hosmer's hymn. I commend the entire sermon to your attention; parts of it will make you smile.

This paper examines the relationship between tax structures and economic growth by entering indicators of the tax structure into a set of panel growth regressions for 21 OECD countries, in which both the accumulation of physical and human capital are taken into account.

The results of the analysis suggest that income taxes are generally associated with lower economic growth than taxes on consumption and property. More precisely, the findings allow the establishment of a ranking of tax instruments with respect to their relationship to economic growth. Property taxes, and particularly recurrent taxes on immovable property, seem to be the most growth-friendly, followed by consumption taxes and then by personal income taxes. Corporate income taxes appear to have the most negative effect on GDP per capita.

These findings suggest that a revenue-neutral growth-oriented tax reform would be to shift part of the revenue base towards recurrent property and consumption taxes and away from income taxes, especially corporate taxes. There is also evidence of a negative relationship between the progressivity of personal income taxes and growth.

All of the results are robust to a number of different specifications, including controlling for other determinants of economic growth and instrumenting tax indicators.

Readers of this blog will know that I favor shifting to a tax on land value, and eliminating the portion of the conventional property tax which falls on buildings and other improvements to land. But I'm fascinated that their analysis shows that even taxing buildings and other improvements to land, along with land value, is superior to taxing consumption or personal income or corporate income, in terms of the effects on economic growth.

So I'll leave you with this question: if we know that income taxes and consumption taxes discourage growth more than the conventional property tax does, in whose interest is it that we not rely heavily on the property tax? Cui bono?

Go to the root of the problem. Recognize who benefits from the status quo. They like the current system just fine, and will fund heavily efforts to conserve it.

And when California (Proposition 13 forces reliance on wage and sales taxes to "protect" property owners) and other states, including soon Indiana, start complaining about a lack of economic growth, and when New York State's new Governor Cuomo starts talking about "property tax relief," understand that this is code for "we'll take care of our friends who own the choice urban sites, the ordinary man be damned!" This is called conservatism. Like Aleve, it works for them. Does "landed gentry" still resonate?

Notice that this study has been around for two years now. How many times have you heard about it? (It was news to me.) Even the "FairTax" (23%+ consumption tax) folks haven't mentioned it, as far as I know.

<p><a title="Do tax structures affect aggregate economic growth? Empirical evidence from a panel of OECD countries" href="http://www.oecd.org/LongAbstract/0,3425,en_2649_34325_41487020_119684_1_1_37443,00.html">Do tax structures affect aggregate economic growth? Empirical evidence from a panel of OECD countries</a>.</p><blockquote cite="http://www.oecd.org/LongAbstract/0,3425,en_2649_34325_41487020_119684_1_1_37443,00.html"><strong>Do tax structures affect aggregate economic growth?&nbsp; Empirical evidence from a panel of OECD countries&nbsp;</strong></blockquote><blockquote cite="http://www.oecd.org/LongAbstract/0,3425,en_2649_34325_41487020_119684_1_1_37443,00.html">This paper examines the relationship between tax structures and economic growth by entering indicators of the tax structure into a set of panel growth regressions for 21 OECD countries, in which both the accumulation of physical and human capital are taken into account.&nbsp;</blockquote><blockquote cite="http://www.oecd.org/LongAbstract/0,3425,en_2649_34325_41487020_119684_1_1_37443,00.html">The results of the analysis suggest that income taxes are generally associated with lower economic growth than taxes on consumption and property.&nbsp; More precisely, the findings allow the establishment of a ranking of tax instruments with respect to their relationship to economic growth.&nbsp; Property taxes, and particularly recurrent taxes on immovable property, seem to be the most growth-friendly, followed by consumption taxes and then by personal income taxes.&nbsp; Corporate income taxes appear to have the most negative effect on GDP per capita.&nbsp;</blockquote><blockquote cite="http://www.oecd.org/LongAbstract/0,3425,en_2649_34325_41487020_119684_1_1_37443,00.html">These findings suggest that a revenue-neutral growth-oriented tax reform would be to shift part of the revenue base towards recurrent property and consumption taxes and away from income taxes, especially corporate taxes.&nbsp; There is also evidence of a negative relationship between the progressivity of personal income taxes and growth.&nbsp;</blockquote><p style="padding-left: 30px;">All of the results are robust to a number of different specifications, including controlling for other determinants of economic growth and instrumenting tax indicators.</p><p>The full study, 28 pages, is at <a href="http://www.oecd.org/officialdocuments/displaydocumentpdf?cote=eco/wkp%282008%2951&amp;doclanguage=en">http://www.oecd.org/officialdocuments/displaydocumentpdf?cote=eco/wkp%282008%2951&amp;doclanguage=en</a></p><p>Readers of this blog will know that I favor shifting to a tax on land value, and eliminating the portion of the conventional property tax which falls on buildings and other improvements to land.&nbsp;&nbsp;&nbsp; But I'm fascinated that their analysis shows that even taxing buildings and other improvements to land, along with land value, is superior to taxing consumption or personal income or corporate income, in terms of the effects on economic growth.<br /> <br />So I'll leave you with this question: <strong>if we know that income taxes and consumption taxes discourage growth more than the conventional property tax does, in whose interest is it that we <em>not rely heavily on the property tax?</em>&nbsp;&nbsp; Cui bono?</strong></p><p>Go to the root of the problem.&nbsp; Recognize who benefits from the status quo.&nbsp; They like the current system just fine, and will fund heavily efforts to conserve it.</p><p>And when California (Proposition 13 forces reliance on wage and sales taxes to "protect" property owners) and other states, including soon Indiana, start complaining about a lack of economic growth, and when New York State's new Governor Cuomo starts talking about "property tax relief," understand that this is code for "we'll take care of our friends who own the choice urban sites, the ordinary man be damned!"&nbsp;&nbsp; This is called conservatism.&nbsp; Like Aleve, it works for them.&nbsp; Does "landed gentry" still resonate?</p><p>Notice that this study has been around for two years now.&nbsp; How many times have <em>you </em>heard about it? (It was news to me.)&nbsp; Even the "FairTax" (23%+ consumption tax) folks haven't mentioned it, as far as I know.</p>

September 06, 2010

WASHINGTON – President Obama on Monday is to call for as much as $50 billion in government spending to start up a long-term public works plan emphasizing transportation projects – roads, rail and airport runways – over the next six years.

Okay. Sounds good. This is what some people have called Pork, when the money has been invested in other people's congressional districts.

Good infrastructure projects are very worthwhile, and, properly conceived, well designed and well executed, will serve the public for decades, perhaps many generations. Look at what the CCC accomplished during the Depression. Look at the Interstate Highway system. Look at the service that commuter rail and, in some places, intercity rail offers.

But local government has failed to follow through. Federal investment in infrastructure is the "1" of the "1-2 punch," but if local, county or state governments fail to respond appropriately, much of the benefit is lost.

Every worthwhile infrastructure project creates (or in the case of necessary maintenance, maintains) far more land value than the cost of the project. Consider:

the George Washington Bridge across the Hudson created how much land value in northern New Jersey?

the Golden Gate Bridge created how much land value in Marin County, California?

the Tappan Zee Bridge across the Hudson created how much land value in Rockland and Westchester Counties?

the Northway created how much land value north of Albany, New York?

the Verrazano Narrows Bridge created how much land value on Staten Island?

Who benefited? The landholders! Federal dollars were poured into these projects, and individual landholders reaped the windfall we created. Their communities and counties and states could have taken two simple steps to recycle that value -- and still can!:

Assess the land value every few years. (Assessing land value is not expensive or difficult to do well, if one sets out to do it. Unfortunately, many assessments are focused on buildings, or on the property as a whole, and only later assign a land value, which may bear little relation to market values.)

Collect some significant portion of the value which results from federal, state, county and local investment in infrastructure and services. Don't tax the buildings. Don't tax sales. Don't tax wages. Just the land value.

And if the local, county and state governments don't see fit to collect that value for local, county or state purposes, the federal government ought to be able to step in and collect it. After all, WE created it. It doesn't belong in private pockets. And if we collected it, we could reduce or eliminate the dumb taxes which burden our economy.

Which is the whole point of stimulating the economy, isn't it?

Unless, of course, we're doing it for the benefit of the 10% of us who receive about 48% of the income, or the slightly different 10% of us who own 71.5% of the net worth, in which case this is a very poor idea. Remember what Leona Helmsley told us: "WE don't pay taxes. The little people pay taxes."

Shall we create more unearned income for them? Or shall we create incentives for localities and states to recycle that value, with the option of collecting it for federal purposes if they choose not to?

September 05, 2010

The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.

Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.

As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

It seems as if the suggestion is that we ought to let the housing market crash, and then hope that we will pick up again where we left off, and experience this boom-bust cycle again.

There doesn't seem to be much discussion of the factors that produce the boom-bust cycle, or of the notion that we can actually prevent the next boom-bust cycle through wise policy.

What policy? A tax shift. Shift taxes off wages (starting at the bottom); off sales (starting with essential items); off buildings of all kinds and equipment. What's left to tax?

That which we should have been taxing all along: the value of land. Henry George (b. Philadelphia, 1839; died NYC, 1897) introduced the idea in his 1879 book, Progress and Poverty, which remains 130 years later the best selling book ever on political economy. It sold over 6 million copies by 1900, and George, Thomas Edison and Mark Twain were perhaps the three best-known public figures of their day. George's "remedy" came to be known as the "Single Tax." It was a recipe for small government -- right-sized government, funded by the only legitimate revenue source: value created by nature and by the community. Land, to the classical economists -- Adam Smith, David Ricardo, John Stuart Mill, Henry George, etc. -- was distinctly different from capital. (The neoclassical economists -- and those who only know their sort of economics -- can't seem to see the difference, and conflate them, leading to all sorts of stupid -- and unnecessary -- messes!) Land includes not just the value of locations (on earth, in water, in space) but also electromagnetic spectrum, water rights, non-renewable natural resource values, pollution "rights," and lots of other like things. (Mason Gaffney provides some excellent lists.) Those locations include urban land, land made valuable by favorable climate, water supply, access to ports, to transportation systems, to desirable views, to vibrant cities with jobs, cultural amenities, educational opportunities; geosynchronous orbits; congestion charges; parking privileges, etc. Those of us who claim title to a piece of land ought to be required to compensate the community in proportion to the value of that land, for the right to exclude others from it. That compensation should be paid month in and month out, to the community.

Our current system is perverse. We must purchase the rights to the land from the previous holder at whatever price the market will bear, or what the seller's circumstances require him to accept. Rich landholders can hold out for higher asking prices; poorer ones may be forced to accept lower prices. Few of us enter the market with more than a few percent of the asking price in hand; we mortgage our future earnings in order to pay the seller's asking price.

In most coastal cities, that price is predominately for the location, not for the building itself. A May, 2006, Federal Reserve Board study found that land represented, on average, 51% of the value of single family housing in the top 46 metro markets in 2004; in the San Francisco metro, land represented 88.5% of the value, and in no metro in California did it represent less than 62%. Boston metro was around 75%, NYC metro was about 70% (I'm doing this from memory), Oklahoma City about 20%; Buffalo about 28%. Extrapolating from some of their tables, I found that the average value of a single-family structure across the 46 metros was about $112,000, with a range from perhaps $88,000 in the lowest metro to a high of perhaps $130,000 in the highest. The range of average land values across the 46 metros, though, was much wider, from perhaps $25,000 to $750,000!

Suppose we did let the housing market crash, and then shifted over to George's proposal, collecting our tax revenue first from land rent, and only after we'd collected the lion's share of the land rent, tapping other less desirable revenue sources such as wages, sales and buildings. What would happen?

The selling price of housing would drop to approximately the depreciated value of the structure in which one would live. A large new house would be more valuable than an older house of the same size. A large house would cost more than a smaller one. But one would not pay the seller for value that related to the location of the home.

One would pay, month in and month out, the rental value of the land on which the house sits. Fabulous locations would require high monthly payments; less fabulous ones would have lower monthly payments. Small lots would pay less than larger lots nearby. Owners of condos in a 20-story building would share the cost of the land rent for the site, perhaps in proportion to the quality of their location within the building (fabulous views would pay more than ordinary ones; larger footprints and/or more floors occupied would pay in proportion to their share of the total space).

That monthly payment would go to one's community, and would replace one's property tax, sales taxes, wage taxes. A portion of the payment would be forwarded to one's state, and at the state level, a portion would be forwarded to the federal government.

The selling price of housing would drop, requiring one to borrow far less. The difference would be quite pronounced in San Francisco, Boston, NYC, etc. One's monthly mortgage payment would be significantly lower.

Housing would no longer be an investment, in the sense that one expected to sell a property for more than one paid for it.

Housing would be more liquid; one could own a home, but have a reasonable expectation of being able to sell it if one wanted to move elsewhere.

The credit not used to purchase homes would be available for businesses. Businesses, too, would not be "investing" in land, but would have capital available to invest in equipment and to pay better wages to their employees.

Land which under our current system is both well-located and underused would either be redeveloped by its owners, or come onto the market so that someone else could put it to use. There would be no incentive to keep it underused, as there is today. The redevelopment process itself would create jobs in construction-related businesses, and the resulting buildings would either provide housing or commercial venues -- or both: whatever the market was asking for. And that housing would be at a wide range of points on the income spectrum and the ages-and-stages spectrum: young people starting out, families, retirees, singles, couples -- not just the luxury market. And those newly-created homes would be closer in to the jobs which would support them, rather than separated by long commutes and drive-till-you-qualify.

Land made valuable by public investment in infrastructure and services would provide a continuous revenue stream to the community, providing funding for next year's services, instead of funding for self-selected individuals' retirement.

So if one can't hope to get rich from the appreciation of the land under one's home, how is one to have security? How does one participate in the economy? By investing in businesses that serve customer desires. And when one's housing plus taxes are lower, one has more left over for that. When there is enough housing for all, one isn't paying so much of one's income for it. When no one expects to grow wealthy automatically, people can dream up the business which they will enjoy working in. And with so many businesses competing for workers, wages will tend to rise. With so many businesses competing for customers, services will improve, and specialization increase.

Back to the title of the article: "Grim Housing Choice: Help Today's Owners or Future Buyers?" Maybe economics doesn't HAVE to be the dismal science. Maybe our choices are not so grim after all. Maybe we can put ourselves on a firmer footing, without the boom-bust cycles we've been experiencing so regularly. (See Mason Gaffney's recent book, After the Crash: Designing a Depression-free Economy. And while you're on that site, you might read "The Great Crash of 2008" and "How to Thaw Credit Now and Forever.") Maybe we can leave our children a society in which all can prosper.

Not too much to ask for, is it?

Or shall we leave them a society in which 10% of us are receiving 48% of the income, and 10% of us possessing 71.5% of the net worth.

June 16, 2010

On the one side are those who believe in democratic capitalism — ranging from the United States to Denmark to Japan. People in this camp generally believe that businesses are there to create wealth and raise living standards while governments are there to regulate when necessary and enforce a level playing field. Both government officials like President Obama and the private sector workers like the BP executives fall neatly into this camp.

On the other side are those that reject democratic capitalism, believing it leads to chaos, bubbles, exploitations and crashes. Instead, they embrace state capitalism. People in this camp run Russia, China, Saudi Arabia, Iran, Venezuela and many other countries.

Many scholars have begun to analyze state capitalism. One of the clearest and most comprehensive treatments is “The End of the Free Market” by Ian Bremmer.

Bremmer points out that under state capitalism, authoritarian governments use markets “to create wealth that can be directed as political officials see fit.” The ultimate motive, he continues, “is not economic (maximizing growth) but political (maximizing the state’s power and the leadership’s chances of survival).” Under state capitalism, market enterprises exist to earn money to finance the ruling class.

The contrast is clearest in the energy sector. In the democratic capitalist world we have oil companies, like Exxon Mobil, BP and Royal Dutch Shell, that make money for shareholders.

In the state capitalist world there are government-run enterprises like Gazprom, Petrobras, Saudi Aramco, Petronas, Petróleos de Venezuela, China National Petroleum Corporation and the National Iranian Oil Company. These companies create wealth for the political cliques, and they, in turn, have the power of the state behind them.

It might be worth looking at these assertions in light of how wealth is distributed ... concentrated might be a better description ... in America. The 2007 Survey of Consumer Finances, from the Federal Reserve Board, reports the following distribution of "Equity," which includes individual stocks and equity mutual funds, whether held in retirement or non-retirement accounts:

Bottom 50% 1.5%Next 40% 19.6%Next 5% 12.4%Next 4% 30.5%Top 1% 36.0%

The SCF also reports the distribution of holdings of "BUS" -- the value of privately-held businesses:

Bottom 50% 0.4%
Next 40% 6.0%
Next 5% 5.5%
Next 4% 25.5%
Top 1% 62.7%

The two categories are of roughly equal size: Equity $13.7 trillion and BUS $14.9 trillion. So one might reasonably estimate that the top 1% have roughly 50% of the aggregate value of these two categories, and the next 4% have about 28% -- leaving 22% for the bottom 95% of us.

If state capitalism puts, say, 80% of business in the hands of the top 5%, is it that much worse than what we've got? In some ways, yes -- but the question is worth pondering.

Brooks closes with this:

We in the democratic world have no right to be sanguine. State
capitalism taps into deep nationalist passions and offers psychic
security for people who detest the hurly-burly of modern capitalism. So I
hope that as they squabble, Obama and BP keep at least one eye on the
larger picture.

We need healthy private energy companies. We also need to gradually move
away from oil and gas — the products that have financed the rise of
aggressive state capitalism.

More than "needing healthy private energy companies" we need to start collecting for the commons more of the value of the natural resources they draw from our common supply -- not to mention forcing them to privatize the environmental risks associated with drilling. Remember what Henry George said about a well provisioned ship? He who controls the hatches controls his fellow human beings.

And of course, we need to be undertaking the shift of incentives which will redirect sprawl into the underused sites in our cities. Land value taxation -- untaxing buildings, and uptaxing land value -- will produce the urban density which will lead to walkable cities and populations which will support effective public transportation systems. It will provide technologically modern housing affordable to people at all levels of the income spectrum, close to their work -- for those who want that. The reduced pressure on the suburban markets will lower prices there, too, for those who want that. That urban redevelopment will also create more commercial venues in the centrally located places where specialized businesses thrive. And of course all that building activity creates jobs, and those new technologies will produce buildings which use less energy and produce less pollution. And because untaxing buildings removes the penalties associated with things like solar power, all the incentives will be pointing in the same direction.

June 14, 2010

But where does that dynastic plutocracy begin? There is an astronomical gap between Mr. Buffett’s fortune, which Forbes estimated at $47 billion, and two retirees in Marin County, California, whose life’s work might have allowed them to leave their heirs $3.5 million in assets, mostly in the value of a house.

Oh, I was so pleased to read someone expressing it so clearly. Tell me about that house in Marin County. Let's see. Let's say our retirees bought it in, say, 1980, for, say $200,000. They probably put down 10% or 20% in those days (borrowing standards were a little different then). Let's say that they had a mortgage for, say $160,000, at 8%. They finished paying it off last year. The monthly mortgage payment was $1,174. Over the course of 30 years, they paid off $160,000 of principle, and paid the lender about $266,000 in interest. To rise from the $200,000 purchase price to today's value of $2 million, the average annual appreciation was about 8.3%. Obviously, some years it was more, some less. But 8.3% is an average.

What the paragraph quoted doesn't explain is how our hard-working retirees caused their property to appreciate by 8.3% per year over 30 years.

The reality is that houses depreciate. What rises in value is the land, and it rises for reasons which have nothing to do with the individual landholders, or even all the landholders in aggregate. Land appreciates as a result of the presence and growth of population and a healthy economy; as a result of the public provision of goods and services which people value and which make a community or state a better place to live. Advances in technology can also contribute to increases in land value -- consider elevators in cities, air conditioning in the American south, fiberglass boats in waterfront communities.

Our retirees experienced an 8.0% average annual growth in the value of their residence. Paying off their mortgage raised their equity by the $160,000 they originally borrowed. Appreciation, provided by their community and their nation, provided $1,800,000 -- over 10 times as much! Their hard work paid the mortgage, but their community contributed FAR more.

But, you might argue, they did pay property taxes all those years. Yes. Under Proposition 13, their property tax is based on 1% of the assessed value of the property, and the assessed value of the property can only rise by 2% per year, no matter how much the market value has risen. Voters can approve additional payments in the form of parcel taxes, which might bring taxes up to perhaps 1.25% of the assessed value of the property.

At 1.25%, over those 30 years, our hardworking Marin retirees have paid in $109,514 in property taxes. The rest of their "hard-earned" appreciation comes from

the scarcity of housing close to California's cities, compared to the number of people who would like to live close in;

spending supported by taxes on sales and wages -- which come not only from their own pockets but from the pockets of the 50% of California residents who are renters because they can't afford to buy;

federal dollars spent on California infrastructure

effects created by changes in mortgage interest rates and mortgage lending policies, including loan-to-value ratios, underwriting standards related to income ratios, etc.

Does it seem churlish to collect back a portion of the value we-the-people have created once per generation? We'd be much wiser to collect it year-in and year-out, in the form of a tax on the value of the land itself, and let our workers keep their wages and not pay taxes on their purchases or homes.

Does it seem churlish that the Marin retirees' children should not be entitled to keep all that value we-the-people created just as if the retirees had created it themselves? After all, other people's children, including those of tenants, don't get to keep that value, but they've contributed to creating it.

A 15% capital gains tax on the $1,800,000 somehow seems an insufficient share for the commons. Even a 50% estate tax seems a bit insufficient, too.

This is trickle-up economics at work, and saying that some of it trickles to people we might consider middle class doesn't change the fact that some grow wealthy in their sleep, while others simply grow poor despite working hard for decades. The two situations are not unrelated. (And a $3.5 million estate doesn't fall into most definitions of middle class in America.)

June 05, 2010

A friend passed along this excellent piece, from the City Club of New York just over 100 years ago. It is long, but highly instructive, and quite relevant in the 21st century.

Do you want to know the mechanisms by which we concentrate wealth into the portfolios of a narrow slice of our population? Read this. Read Fred Harrison's Wheels of Fortune. Watch Fred's brief video, Ricardo's Law: The Great Tax Clawback Scam:

And consider a town or city you know. Is your experience any different?

Why on earth would we finance infrastructure any other way? Well, California's Proposition 13 is designed to make sure California can't. No wonder the state is in such trouble.

Remember what Leona Helmsley told us: "WE don't pay taxes. The little people pay taxes." She wasn't talking about tax evasion; she was describing tax structure. THIS is how wealth concentrates.

The reference to Spuyten Duyvil is to the point where today the Henry
Hudson Bridge, on the parkway of the same name, crosses from upper
Manhattan into Riverdale, in The Bronx. (It refers to devilish currents
in the rivers, which menace unsuspecting rowers.)

Building of Rapid Transit Lines In New York City By Assessment Upon Property Benefited

A Memorandum Addressed to the Board of Estimate and Apportionment
And The Public Service Commission of New York City.

The City Club of New York
55 West 44th Street
October 2, 1908

The Board of Estimate and Apportionment and the Public Service Commission:

Dear Sirs:

The City Club respectfully submits for your consideration the results of inquiries made through its Transit Bureau with relation to the feasibility of meeting the cost of future subway extensions by means of assessments on the property benefited.

The city urgently needs more rapid transit roads. Private capital seems disinclined, at present at least, to finance the work of building. The city's borrowing power is utterly inadequate to cover the need, and will be until relief may be secured through the slow process of constitutional amendment. If the necessary lines are to be built, it seems self-evident that other methods must be considered.

The Club's investigations show that in the outlying districts reached by the present subway, and to some degree the nearer sections, the value of the property served has increased to an extraordinary degree. This added value would have paid for the cost of the work several times over. While the city as a whole has benefited greatly, the scale of local benefit is naturally much greater. In our judgment, it would not only be helpful as a solution of the problem, but far more equitable to charge a proportion of the cost of constructing a rapid transit line to the property most benefited by such construction.

The argument is elaborated, and the exact results of the Club's investigation given, in the accompanying memorandum. We trust that this may have your examination, and that if the plan commends itself to your judgment, the future policy of the city may be shaped accordingly.

Very respectfully yours,
Homer Folks, Chairman, Transit Committee.

Henry C. Wright, Bureau Director.

BUILDING OF RAPID TRANSIT LINES IN NEW YORK CITY
BY ASSESSMENT UPON PROPERTY BENEFITED

For many years the city has deemed it just to assess upon abutting property the cost of opening streets and building sewers. The theory of such a tax upon property is that it receives almost the exclusive benefit from the construction of a street or sewer adjacent to it. The question naturally arises, does not a transit line, by the benefit that it confers, fall in the same class as new streets and sewers? If a street railroad or rapid transit line be extended into an undeveloped territory, is it not built primarily for the purpose of furnishing transit facilities to future residents in that section? People will buy this property primarily because it has good transit facilities and the value placed upon it is largely based upon its accessibility. This being true and universally admitted, why should not the property thus enhanced in value by the extension to it of a transit line pay for the construction of such line, to the extent that the increased value warrants it, instead of receiving such increased value as a present from the city. This principle, in a modified and unofficial form, is operated in Berlin. The assessment is not collected by the city, but the street car company when extending a line to outlying territory requires the owners of the property benefited to guarantee to the company a certain return upon the cost of such extension.

May 31, 2010

I've not heard any really good answers to this question yet. Which is not to say that I don't think there are answers; they just aren't being widely discussed yet.

The answer lies deeper than the analyses which are commonly discussed. We need to shift our incentive system at a deeper level than what is currently being discussed.

We spend a lot of money heating and cooling older homes many miles from where people actually work. People commute long distances -- most of them via private cars because there aren't viable alternatives. Why do they live so far from their work? Usually because they can't afford to live closer.

The selling price of most housing within a commutable distance of any vibrant city is mostly land value. And most people don't know it.

Let me say that again.

The selling price of most housing within a commutable distance of any
vibrant city is mostly land value. And most people don't know it.

And they don't know why this is so, or realize that there is an alternative which would be desirable from virtually every point of view, or realize the far-ranging ramifications of this reality. And this is as true of people who hold graduate degrees in economics from our best universities as it is of people whose formal education ended with high school.

And the fact that the selling price of a home in a metropolitan area is mostly land value -- not value associated with the current structure -- seems to be invisible to most of us. As are the ramifications of the fact that houses -- like nearly everything else which is manmade -- depreciate! What appreciates is land value -- locational value -- and it appreciates for reasons which have nothing to do with the landholder himself.

The ramifications? I'll list a few here, but the list is very long.

As population grows and more jobs are in cities, population density in the city itself and the closest surrounding suburban rings needs to increase. What might once have served as large-lot single-family housing ought to give way to multi-family housing -- townhouses, low-rises, mid-rises. Vacant lots ought not to remain vacant for long. Low-rise commercial ought to give way to mid-rise commercial, or high-rise mixed use, with retail on the street level and housing or offices above.

More people living in walkable communities, with public transportation to move them to their work, reduces our reliance on cars.

More people living in technologically modern housing reduces the per-person fuel to heat and cool their living spaces.

Incentives which discourage redevelopment of underused sites are counterproductive

Incentives with encourage the prompt redevelopment of well-located sites to their highest and best use will reduce our reliance on oil and other non-renewable natural resources as well as the pollution associated with those fuels.

When we tax land value, we don't take from anyone value which they created.

When we tax land value, we reduce our reliance on income taxes and sales taxes.

When we tax land value, we can reduce our taxation of buildings and other improvements, which reduces the disincentives to redevelopment, to using modern techologies -- both of which create jobs.

When we tax land value, we reduce the selling price of housing, making it more affordable to ordinary people, and requiring them to borrow less. This frees up credit for activity which creates jobs.

When we tax land value, we stabilize our economy, reducing or eliminating the boom-bust cycles which afflict us roughly every 18 years.

March 17, 2010

This is a well-researched piece about a Menlo Park, California, parent, concerned about program cuts in her child's school, who looked into consequences of Proposition 13, with emphasis on the proportion of funding coming from commercial property owners versus the owner-occupied residences.

Ms. Bestor's research of Menlo Park properties -- particularly of
parcels on one commercial strip and one residential street -- sheds
light on how the provisions of propositions 13 and 58 created the
lopsided tax-burden equation.

Looking at Menlo Park's main downtown street, she found that of the 56
commercial parcels on Santa Cruz Avenue, 23 are at the 1978 assessment
(plus 2 percent per year) level. Of those 23 parcels, only four are
owned by the same people who owned them in 1978. Eleven have passed to a
son or daughter, and in a number of cases are held in family trusts.

By contrast, of the 53 residential parcels in Ms. Bestor's
neighborhood, 13 are owned by the same people who held them in 1978, and
two are held by children of the 1978 owners, so are taxed at the 1978
level. The assessments of two other parcels were affected by other
factors.

The other 36 parcels (including Ms. Bestor's) have been reassessed
after changing hands, she says.

"My street is paying its way," Ms. Bestor says. "I think that Prop. 13
did what people hoped it would do (for homeowners). It allowed people to
stay in their homes and families to plan their financial futures."

What she doesn't say, of course, is that while her street might be "paying its way" -- I'm not quite sure what she means by it -- some of its residents are paying quite a bit more than their long-time-owning neighbors. 15 out of 53 are being highly subsidized by newer arrivals, and those who have bought most recently are doing the subsidizing. They are paying 1% of their purchase price annually, but due to some neighbors in similar homes getting 90% subsidies, they are not receiving in services as much as they would if their neighbors weren't receiving a 90% discount on their tax bills. Ms. Bestor is too polite to say it. It is not clear whether she is a subsidizer or a subsidizee within her neighborhood.

Her research, however, on the commercial sector, which she chooses to focus on, appears to me to be based on the right questions.

The article continues,

On the other hand, commercial property owners who are assessed at 1978
levels are not paying their way, she says. "Does it really make sense to
subsidize family trusts, major real estate corporations and developers,
who make smaller and smaller contributions (proportionally) to public
services each year?"

In her letter to Mr. Buffet, Ms. Bestor cites a downtown Menlo Park
example to underscore the inequity: "The Trader Joe's property -- the
'new' market in town contributes just $7,471 of general tax towards our
local services (for two-thirds of an acre of prime commercial property)
compared with Draeger's up the street at $66,585. It isn't Trader
Joe's, of course, that's paying the tax -- if they'd bought the property
when they moved in, that parcel would be contributing 500 percent-plus
more.

"Trader Joe's leases it from a family trust, descendents of the 1978
owner ... with an address on a leafy street in Cape Cod. Since landlords
charge what the market will bear, it's fair to guess that the property
tax savings are accruing to those folks in Massachusetts while the
costs are borne by school kids and residents of Menlo Park."

Assuming that Draeger's and Trader Joe's are both on sites of comparable value, and that both are tenants, the annual costs to the tenants are probably comparable. The difference is that Draeger's pays more of it to Menlo Park, and Trader Joe's pays more of it to the landlord, bypassing the city.

Now here is the question: who has created the land value? The landlord? The tenant? Or the community? If the landowner and the landuser are the same entity, is the answer any different?

Let's think about what Prop 13 does to and for residential owner-occupants. Local conditions -- jobs, good schools, attractive views, recreational opportunities, high-quality health care -- attract newcomers to the community. If new housing is not being constructed -- houses where there was previously vacant or farmland, or multi-family homes where previously single-family homes stood, or smaller lots -- the price of existing homes is driven up. (Houses don't appreciate, but the land value rises.)

But Prop 13 reduces the supply of houses available by reducing the normal turnover. Where in most parts of the country, elderly people might decide that the house in which they raised their children no longer fits their needs, or is too large to heat/cool/clean/maintain/navigate in, particularly for a single adult, in California, they have several strong incentives to stay there nonetheless:

Their property taxes, if they've lived there for 30 years, are tiny, particularly for what some of the choicest (highest-appreciation) towns are offering in terms of amenities. This is known as a "free lunch." But it is only "free" to them. It does not come out of thin air; it comes at the expense of their neighbors.

Their children can inherit their highly-subsidized status, and receive all that the town offers for a tiny fraction of what ordinary folks would pay there, or what they would pay in a comparable neighborhood or town nearby. They will be able to put the grandchildren into some of the finest school districts and pay only the 1976-based property tax rate, a tiny fraction of what the new folks next door must pay.

Like everyone else, they hate to think of moving. Prop 13 provides them a good excuse to "think about it later" or not think about it ever.

At the same time, young families living in apartments or condos, which typically have two or perhaps three bedrooms, want more space. To get it, they must either compete with others who want to buy from the constrained supply of family-sized housing available, or locate further out -- putting a load on highways, using fuel, creating pollution, paying for 2 cars where one might have sufficed, reducing the time they can spend with their children, and possibly requiring the building of more houses on the fringe, requiring the extension of taxpayer-provided infrastructure (roads, water, sewer, drainage, roads, parks, etc.) and services (police, fire, ambulance, hospitals, libraries, public health, etc.) more schools (while the ones in the neighborhood they'd have preferred are not filled, because a lower percentage of the homes have school-aged children).

California has among the lowest homeownership rates in the US; the figure that sticks in my mind is 55% when the total US was 69%, which means that the homeownership rate for the rest of US must have been perhaps 72%.) That's pretty well known. But you might be interested to know that California's seniors actually have a higher homeownership rate than their counterparts in the remainder of the US. Prop 13 is clearly a major factor in that.

While I understand the pressures on Ms. Bestor not to speak of the Emperor's nudity, and applaud her research, as far as it goes, I think the entire Prop 13 system needs to be examined and dismantled.

She proposes capping the Prop 13 benefits to commercial property owners at 20 years. This would produce some interesting effects on revenue flows if all commercial properties get re-evaluated at the same time, and continue some awesome inequities if some get re-valued now and some 19 years from now.

Prop 13 – and then Prop 58 that made Prop 13 bases inheritable – has
created economic inequities that are evident from simple on-line
searches of the county assessor's database – and destroy any idea of a
level business playing field. A quick trip around my town illustrates
this.

The nondescript little gas station on El Camino near my house pays
$30,148 a year in property tax for the privilege of selling me less
expensive gasoline than the two Shell stations ($14,214; $17,214), the
Union 76 ($15,920), and the Chevron ($20,388) down the street. Those
big-name stations have service bays to increase revenue and are on major
intersections. But the "new guy" in town (well, actually, there's been
a station there since 1978 -- but the new competitor in the market) is
the one who's paying $10,000 a year more for police, fire, road repair,
education, parks and courts.

Flipping the equation around, the Trader Joe's property -- the "new"
market in town -- contributes just $7,471 of general tax towards our
local services (for two-thirds of an acre of prime commercial property)
compared with Draeger's up the street at $66,585. It isn't Trader
Joe's, of course, that's paying the tax -- if they'd bought the property
when they moved in, that parcel would be contributing 500%+ more.
Trader Joe's leases it from a family trust, descendants of the 1978
owner ... with an address on a leafy street in Cape Cod. Since
landlords charge what the market will bear, it's fair to guess that the
property tax savings are accruing to those folks in Massachusetts --
while the costs are borne by school kids and residents of Menlo Park.

Of course, if the Cape Codders visited, they would probably look across
Curtis Street to the Walgreens (Unamas and Starbucks) building and point
out that that whole complex is only paying $8,709 in general property
tax ... without providing customer parking. In fact, the Walgreens
building pays 51% more for sewer service ($13,181) than it does towards
police, firefighters, courts, roads, and maintaining its free city
parking ....

Do you wonder whether any commercial properties ARE contributing
meaningfully towards our local services? Well, the Chase takeover of
Washington Mutual appears to have triggered a reassessment of that
property (WaMu's earlier absorption of Home Savings had not). So that's
an additional $25,000 into the pot (up to $45,190). And a dry cleaner
we use, Menlo Art, is in a building that pays $30,346. The dry cleaner
only occupies 25% of the building, so their share is a mere $7,587 --
but compare that with the $944 paid by the much busier cleaner across
Santa Cruz Avenue. (Hoot'n'Toot sits on yet another property whose
sewer bill dwarfs their property tax contribution -- with an
out-of-state owner on the possibly-less-leafy Leisure World Drive in
Mesa, AZ.) I wish I could afford Tom Wing's jewelry ($21,687), but I do
have pizza at Amici's ($32,809) whenever possible. And Kepler's, our
doggedly independent bookstore, occupies about a sixth of a building
that pays $220,395.

Well, Mr. Buffett, I think you get the idea. People say that increasing
taxes will make prices go up but, frankly, that requires the generous
assumption that, in this totally unbalanced model, landlords aren't
charging what the market will bear.

To make sure, I tested this. I took identical loads of my husband's
laundry into each of the dry cleaners mentioned above (after a
particularly depressing talk by our school superintendent -- spending
per pupil is down this year over last, with only one new teacher hired
for over 120 new kids, and 14 teachers due to be laid off in May) -- and
found that cleaning three shirts, two khaki slacks and a cashmere
sweater cost me $37.00 at the popular ($944) cleaner, while I paid
$35.60 across the street ($7,587). Wherever the savings are going, it's
not to customers.

And then there's the threat that Business Will Leave if commercial
property taxes go up. Having spent twenty years in the corporate world
before becoming a mom, forgive my skepticism. I sat in on many meetings
at Apple Computer Inc. in the early 80's and 3Com Corp. in the early
90's discussing siting new sales and manufacturing operations. Property
tax was never, to my best recollection, mentioned. Consolidated tax
levels, yes, but in the broad context of the overall cost and relative
ease of doing business. What attracted us? Locations with a level
playing field (not one that discriminated against the new entrant); a
highly skilled (educated) workforce; good road-, rail- and
air-transportation; fair and efficient courts and public services;
reliable infrastructure; and a community environment that made employees
want to live there.

OK, out of fear of throwing the baby out with the bathwater, we are now
drowning him in it.

The original article, near the end, includes this:

So what is to be done? Ms. Bestor suggests capping Proposition 13
benefits for commercial property owners at 20 years. "Every 20 years,
non-residential property is reassessed at market value, then gets to
enjoy another 20 years of tax relief," she writes.

She also suggests a system whereby properties can be reassessed
gradually so as not to overburden assessors' offices, and a process for
appealing reassessments.

Ms. Bestor also is attempting to launch local fundraising efforts that
would focus on commercial property owners who benefit from lower tax
levels. "I have the feeling these people are ready to be asked," she
says.

"They need strong schools and a vibrant residential community just as
much as anyone else does."

Assessing land properly is not all that difficult, and if California would simply stop taxing the buildings, doing high-quality annual assessments of land value would not unduly burden the assessors' offices.

But I think that final point is correct: even absentee landlords benefit from strong schools and a vibrant residential community.

March 09, 2010

My brother (an alum) called this one to my attention. My husband and I are alumni, too, and some years ago, when it came time to look at colleges, our son refused to seriously consider Union because he had seen Schenectady on various visits to campus over the years, and simply couldn't imagine living there for four years. He made a great choice for a college, but I've often mulled over what the article is discussing: that the problems of Schenectady, like much of upstate New York, make it an unhappy place, one where many people would not choose to live, given other options. Its economy is hurting -- and for reasons that can be easily corrected.

Union always had a well-regarded economics department, and being as close to the state capital at Albany, some students did internships in various legislature offices.

So why on earth haven't Union's Economics and Political Science departments applied their sciences -- and talents -- to the problems of Schenectady, and proposed solutions?

Part of the answer might be that for several generations, neither of these sciences have put much thought into the problem that underlies Schenectady's troubles. It hasn't been fashionable to talk about, and many haven't even had the vocabulary. Most of today's economics professors learned their economics at the feet of neoclassical economists. They have a lot to fit into a trimester, and they're not likely to teach that which their own instructors chose to omit. But they're missing something important and relevant. The classical economists had a lot to tell us which points to the root of some of today's most serious problems.

Or perhaps those seeking a better future for Schenectady might turn to the History department, or to American Studies. Students of the last half of the 19th century might be able to tell them about an American philosopher and economist named Henry George (b. 1839, Philadelphia; d. 1897, NYC), who was the best known (due in part to his bestselling book on political economy, Progress and Poverty, which was familiar to anyone who read at all during the last 20 years of that century; it sold about 6 million copies and was widely serialized and translated) of a long continuum of people who called attention to the importance of land and natural resources in our economy, and to the distortions that result when we permit the privatization of their economic value -- or about the movement which followed in the early years of the 20th century. George proposed a simple and just remedy, and I'll bet that not 10 of this year's Union graduates have even heard of it. (That doesn't set Union apart from many other highly regarded colleges, but it is clearly a shame: that these students have spent 3 or 4 years in Schenectady, and not gotten close to some answers about why there is such poverty and underdevelopment in the state of New York, from which many of Union's students come. They come from much richer parts, in general.)

The small cities of upstate New York, like many other places in America, are suffering from the use of the wrong taxes. Schenectady is perhaps an extreme example. When we tax both land value and buildings at the same millage rate, we discourage the sort of development which we claim to want. The answer, of course, is to reduce or even eliminate the tax which falls on buildings, and increase the millage rate on land value.

Union's economics and political science departments owe it to their hometown to take on this topic. First, the faculty must educate themselves. And then they must involve their students, particularly those who come from New York State. They can become a force for good, a force for reform of some miserable policies, and for a shift to superior ones.

They may find themselves coming up against the "real estate interests" -- including alumni, perhaps -- who think that this might not be in their own best interests (and therefore discourage the exploration). (Governor Spitzer, the son of a real estate magnate, would not have been enthusiastic about this, for instance. He convened a panel to try to offer "Property Tax Relief" as an answer to some question -- but it was probably not primarily for homeowners. Remember Leona's wisdom about taxes.) Will Union's best and brightest be able to push through the interested parties' incentives, or will they be derailed by pressure not to study this matter? They have tenure, many of them, and most live in or close to Schenectady.

The political scientists might start with a couple of Google books, such as "Natural Taxation" (by one of the founding partners of Shearman & Sterling) or "The ABC of Taxation." They're available via Google books, and will soon be online in other forms. (Stay tuned here for updates.)

And all might appreciate the writings of Bill Batt, an Albany-based thinker on a lot of important issues which could be of great help to Schenectady.

And if any of them think this might simply be a quaint agrarian idea, I encourage them to read this page, and consider which of these issues don't affect Schenectady or their own futures.

People as diverse as Henry Ford, Theodore Roosevelt, Aldous Huxley, Clarence Darrow, Bernard Shaw, and Leo Tolstoy have embraced these ideas, as have a wide range of wise people from earlier centuries, and contemporaries as diverse as Bill Buckley and Michael Kinsley. They are a fine example of thinking globally and acting locally, and represent a "third way."

Will Union College act -- and in the process, teach its students some important truths -- or simply nibble at the leaves of Schenectady's problems? Go to the root!

Post Script: Union's faculty, and others who care about Schenectady, have an opportunity to get to know these ideas this summer. There will be a conference in Albany, July 12-16, of the umbrella group for North American Georgists. Some of the sessions will be of great interest to those who care about Schenectady, but I mention it here primarily because it will be an opportunity to interact with people who know George's ideas well and are persuaded that they can make an important difference in the world. (This post didn't start out to be a promotion for the conference, but I was glad to find that the conference schedule is now available online. It ends: "The Law of Rent never changes, but our schedule
may - without notice.")

It is very tempting, of course, to recommend that We tax whatever I have the least of. That's the "don't tax you, don't tax me; tax the guy behind the tree" approach, and many people never move beyond it in their thinking about taxation. It is one of the factors that causes us to rely on taxes which fall on people who have relatively little. (Remember Leona Helmsley's statement -- "WE don't pay taxes; the little people pay taxes." -- I don't think she was talking about tax evasion; she was describing how we've structured things.)

When we tax wages, we take from people that which they create. We discourage them from working, from producing, from contributing.

When we tax dividends or interest, we discourage savings and investment. Our corporations need capital. (Notice, however, that when one buys an existing share of stock from another investor, the corporation is not getting a new infusion of capital; what is changing hands is the entitlement to an actual or potential stream of dividends, and to a payment of some size if management decides to sell the corporation to another corporation or some private entity.)

When we tax capital gains, what we are taxing is a mixed bag. Capital does not appreciate. As anyone who has left a home unoccupied for a few months knows, as anyone who has owned a car knows, buildings and machines and the like do not appreciate. They depreciate, even with the best of maintenance. Most "capital" gains are actually either appreciation of land, or relate to the extraction of scarce -- nonrenewable -- natural resources. (Much of what is taxed by the estate tax, too, relates to one of these kinds of gains, which have NOT already been taxed elsewhere in our system. Taxing them once per generation, particularly when there are huge concentrations, is better than not taxing it at all.)

When we tax sales of goods, or sales of services, we impose both on the purchaser and on the buyer; by raising the price of goods or services, we lower the demand for them.

When we tax corporate profits, we encourage corporations to move those dollars to another country. And they are happy to oblige.

When we tax transactions of various kinds, we discourage those transactions. That can be a good thing or a bad thing. If we are discouraging hedge funds from skimming profit away from the market, many would argue this is desirable. If we are discouraging the flipping of houses by making it less profitable, many would argue this is desirable. Some would argue that discouraging liquor, or tobacco, or recreational drug transactions is desirable. Some would argue that discouraging trade with other countries is desirable. (Others would take the position that Henry George took: that it is doing to ourselves in peacetime what other countries might seek to do to us in war!)

When we tax pollution, we should get less pollution.

When we tax buildings, we should expect to have slower redevelopment, poorer maintenance, less investment in energy-conserving technologies and renovations, fewer highrises and less vibrant cities. We will certainly have fewer people employed in these activities or in spaces created by them.

When we tax land value, what happens? To quote the eminent economist Lowell Harriss,

Land as area is fixed in quantity. Tax it heavily,
and it will not move to some other place, or decide to take a vacation,
or leave the inventory of productive resources by going out of
existence. Tax land lightly, and the favorable tax situation will not
create more space in the community.

But we don't have to figure this out over and over. Adam Smith, in The Wealth of Nations, provided us with the canons of taxation -- the criteria by which to judge the various options. You might take a look at these two pages on the subject:

All those goods and services whose effect is to maintain or increase property values -- land values, since buildings depreciate -- should be financed via taxes on land value. We should avoid taxing any of the other possible tax bases at all until we have fully taxed land value. (At this point, you might be wondering what it means to "fully tax land value." Generally, it means to collect something approaching 100% of the annual rental value of the land itself. Quick and dirty, that's about 5% of what the selling price of the land would be in the complete absence of a tax on it. So if a lot would currently sell for $100,000, while bearing no annual tax on land value, the annual land rent would be about $5,000. Land value taxes up to that amount do not place a burden on the landholder. Collecting 100% of that amount would reduce the selling price of the land to a token level, but would not reduce its annual rental value by a penny.)

January 31, 2010

This slideshow lists 10 of the top 11 university endowments in New England (MIT did not reply). They range from Harvard's $25.62 billion down to Smith College's mere $1.09 billion.

It strikes me as odd that the homeowners and businesses in each of their home towns and cities are asked to subsidize them by exempting their landholdings from the local tax base.

This is particularly stark since relatively few of the students at these universities are graduates of the local high schools.

Cui bono?

And who pays?

What a subsidy, often from poor people to rich ones.

And it makes one think of the wisdom of Leona Helmsley.

Urban land is our most valuable resource, and those who occupy it ought to be compensating their neighbors. Universities are large, and often growing, landholders, forcing out tax-paying neighbors, and increasing the share of the burden of supporting municipal services paid by the remaining non-exempts.

Solution? Exempt the buildings, but require such entities to pay their full share of the tax burden based on the value of their land. (Exempt everyone else's buildings, too, of course!)

This is an exciting website which shows promise of digging California out of the hole into which it has dug itself.

The only downside I see for the rest of us is that it will make all the taxes which California residents pay deductible on their federal tax returns, and therefore, perhaps, reduce the tax revenue the federal government receives from this huge state, at least in the short run.

But the upside is exciting: California could be the first state to eliminate the dumb taxes which weigh on any economy: sales taxes and the portion of the wage tax which falls on the first $150,000 of personal income.

As I've noted in an earlier post, Lowell Harriss died a few weeks ago. I've been reading some things he wrote during his long and productive career.

The first is a piece he wrote in 1978, a few months after Proposition 13, California's taxpayer initiative which lowered property taxes and "protected" property owners from paying for services through property taxes, was passed. It is entitled "Property Taxation After the California Vote."

He starts with this: What approach to property taxation would
be most in our interest and that of our children?

He provides some history of the property tax, in general and then specifically in California.

Keep in mind that, in California more than in most of the country,
assessments on homes rather promptly reflect market conditions -- in an
environment in which house and land prices have been rising rapidly.
Often, however, local officials did not use the increases in tax base
to finance offsetting reductions in tax rates. Homeowners faced rising
tax bills; cash income, especially for retired persons, did not always
go up correspondingly.

California's colleges and universities were, however, among the best in the US, and surely some significant portion of the public spending was to provide the very services which caused California's property values to rise.

Lowell went on to say,

The full results of Proposition 13 will not appear at once. Only time
will reveal whether new jobs develop now as property owners use the
addition to their disposable income; whether extensive declines will
occur in state-local employment; and how much more erosion of local
authority will result from expansion of state payments to replace
revenues lost by the sweeping changes in real estate taxes.

He continued,

Present owners of property have voted themselves capital gain
"windfalls." The reduction in property taxes will tend to raise real
estate prices. Today's owners, in voting essentially permanent
reductions in annual property taxes, have enlarged the stream of net benefits
(income) to be capitalized in valuing real estate. This one-time
capital gain in effect absorbs much of the future benefit from the tax
cut. In this respect, the specific results of Proposition 13 are
difficult to judge because assessments (but not the tax rate) will rise
after a sale. Future buyers will pay a higher price -- higher by
enough, in general, to offset the tax benefit. "No election will ever
be lost by votes in the future," runs the
conventional wisdom. And certainly California voters did not have
future property owners (or voters) in mind when they rallied to the
support of Proposition 13.

Lowering the tax reduces the cash required to hold on to underdeveloped
land. "Speculative underutilization" becomes less expensive. Waiting
for population growth and inflation to boost prices will cost less. The
current offerings of land will decline -- and thereby prices will be
raised -- because owners face lower cash pressure to sell or develop.
Income tax considerations, of course, complicate individual decisions
and require some caution in generalization, but the net effect on land
use will be some -- or much -- distortion away from the direction of
free-market forces.

Will the California economy get a boost from Proposition 13? Of course
it will. Other things being the same, tax something, and there will be
less of it (land being an exception). The 50- to 60-percent cut in
taxes on man-made capital will alter favorably the "arithmetic" of
construction projects in California. How much so is difficult to say.
This cost reduction will interact with many other factors, including
the forces tending to raise land prices. The change in prospective net
returns at the margin may be more modest than impressive. But one
conclusion is clear: More capital will flow where tax reduction improves the prospects for investment.

He continues,

The once widely accepted criticism that property taxes are regressive
does not survive modern economic analysis. In fact, a persuasive
argument in favor of property taxation for local services can be made on grounds of
equity. Especially important, it seems to me, is the fact that in
effect this tax enables localities to capture some of the fruits of
forces raising prices of land, including public outlays on streets, schools, sewers, and other facilities.

He concludes,

Finally, and probably of greatest potential, there is a real
opportunity in the wake of Proposition 13 for restructuring
fundamentally the way we tax property. We can reduce burdens on
man-made capital and make up the revenue from higher taxes on site
values, a procedure which seems to me eminently desirable on several
grounds. This possibility should be part of the broader public
discussion of the role of property taxation stimulated by the vote in
California.

One change may be politically tempting -- to reduce burdens on
residential property while maintaining or even raising burdens on
business and public utility property. Such moves would not only add to
concealment of costs of government in the form of hidden burdens on
consumers and investors. In addition, the productive portions of the
economy would suffer. Building better communities will not come from
boosting taxes on business.

Americans should be "up in arms" -- or at least doing something -- about
restricting and effectively controlling the growth of government.
"Revolt" seems to me too strong a term; it also seems misleading,
implying as it
does that a single, dramatic action will do the job. Patient, informed,
continuing efforts are required. Among them will be the reform of
property taxation to develop its potential as a high-quality revenue
producer.

Greater fairness in sharing the costs of local
government constitutes a prime -- but not the only -- reason for
shifting much of the tax from improvements to land. This country will
be around for a long time. So also, I hope, will meaningful local
government. Effective freedom requires financial independence,
including ability and responsibility for raising revenue.

One of the biggest legacies we leave our children
will be the tax system. We want to make it as good as possible. Equity
is one (again, not the only) element of "goodness" of a tax system.

He proposes a shift to a structure where the millage rate on land is about 4 times that on buildings. He talks about transition issues, and issues of equity during and after the transition:

Two markedly different sets of equity issues command
attention. The one of dominant concern ought to be the situation in
which we (and our children) would carry on our affairs after generally
full adjustment as contrasted with conditions then if present practices
were to continue. The long run in which "we" are not all dead! The
other concern involves the transition. The shift itself would produce
results distinguishable from those to prevail after the economy had
settled down to the new system.

Writing of long-term equity issues -- remember that this was 1970 when you consider the dollar figures --

Community Use of
Values Created by Social Development and Local Government Spending

Over the longer run, landowners would get less of
the increment in the values of location. The general public would get
more in the form of a larger flow of the rising yields of the worth of
location (land) to finance local services. On this score, the equity
results commend themselves very strongly indeed. Socially created
values would go for governmental, rather than for private uses -- and
locally. The absorption of the increments for local, rather for state
or national, governmental use would channel these funds on a benefit
basis geographically.

The localities doing most to make themselves
attractive would have most of this revenue source. In major cities
$10,000 to $15,000 (now often considerably more) of governmental outlay
is frequently needed for each new dwelling unit -- schools, streets,
fire and police, sanitation and health, park and prison, facilities.
Under present arrangements much benefit from such outlays in developing
areas accrues to the owner of locations being "ripened" for more
lucrative use; his payment in taxes (and special assessments) toward
the cost will generally be only a modest portion of the total.

He describes this as a "burdensomeless" tax:

As for the future, the tax on values of location
above their present levels would be almost burdensomeless, except as
owners of land and their heirs get less of the "unearned increment" of
rising values over the decades. Much of the element of true economic
surplus would be used for public purposes. For those parcels of land
whose values drop, the annual tax would also decline. Then, because tax
rates on land would be higher than today, local government would share
more fully in the loss of worth. For landowners the proposal would not
be a one-way affair which assumes that land always rises in price.

No other revenue source seems to me to compare so
favorably on this score of fairness. Future users of land would be
no worse off for the much heavier tax they would pay on the value of
location. The purchase price of land would be correspondingly less. Of
the total flow of yield of location value, interest (explicit or
implicit) would be smaller, taxes higher. Who would be less well off?
The landowners and their heirs who would have gotten the (unearned)
increments!

More of the rise in land value which results from
(1) governmental investment in community facilities and (2) the general
rise in demand due to the growth of population and income would go to
pay for the costs of local government. Such a tax on a pure economic
surplus seems to me about as fair as any imaginable source of funds for
financing community services. The National (Douglas) Commission on
Urban Problems estimated that in the 10 years to 1966, and despite
rising interest and tax rates, land prices rose by over $5,000 per
American family -- $250,000 million. Even a modest fraction
of this amount if used for local government would have permitted quite
a reduction of burden on buildings. The estimated rise in land prices
was over four times the total growth of state-local debt and was
greater than all of the property tax paid in the 10-year period.

And

Land as area is fixed in quantity. Tax it heavily,
and it will not move to some other place, or decide to take a vacation,
or leave the inventory of productive resources by going out of
existence. Tax land lightly, and the favorable tax situation will not
create more space in the community.

Our ethos apparently ties economic justice -- equity
-- to rewards based on "accomplishment." This principle does not lead
to justification of large rewards because of the ownership of land.
Differences, big ones, in payments for human services or for the use of
capital can rest on what the recipients have done. But for the owners
of urban locations such justification can rarely be found; when there
have been private inputs for community development, to the extent
feasible administratively, they belong on the tax rolls as improvements
rather than as land.

And just before he concludes, he writes,

What an owner can get in the form of land price
increases in and around cities has made rich men out of owners of
farmland, vegetable plots, and waste areas. More than one owner of a
few acres of potato land on Long Island or farms on the outskirts of
many a city in the United States, of a small plot of rice land near
Tokyo or Bangkok or Taipei, has reaped handsome gains because of the
pressure of population. In America, North and South, in Europe and
Australia and Africa, private enrichment has come to the passive owner
of land who has done little or nothing to enlarge its worth as part of
the city whose growth has brought his good fortune. In fact he may have
paid no more than an infinitesimal fraction of the taxes which have
financed the streets and other governmental facilities that have helped
to elevate the value of his land.

Next, I moved on to a longer piece, from the same time, and containing some of the same material. I ended up feeling that it is perhaps the best piece I've read in a long time on Land Value Taxation. It is titled "Property Tax Reform: More Progress, Less Poverty" and it is a lecture he delivered at DePauw University in 1970. I commend it to your attention.

Finally, I note a book from the TRED -- Committee on Taxation, Resources and Economic Development -- series (#6) entitled Government Spending & Land Values: Public Money & Private Gain edited by C. Lowell Harriss (1973). Each book in this series came out of a 2- or 3-day conference, held at the University of Wisconsin-Milwaukee. Lowell organized this conference, and wrote the book's introduction. Here's the dust jacket material:

Billions of tax dollars are spent
annually on government subsidy programs which are designed to help
certain groups, areas, and industries, and contribute to the general
welfare. Despite the good intentions of legislators, however,
analysts point to evidence that the programs are not only burdensome
for the taxpayer but often fail to do their intended jobs. Critics
find that major benefits go not to those whom the programs are
designed to help, but to others who can "capitalize" on them.

One major feature of the subsidy benefit pattern -- unintended but
predictable -- is the capitalization of land values. The value of
land will increase when the benefits, chiefly money income, are
enhanced by government subsidization. When the land is sold, the
benefit of a subsidy which seems likely to continue will be captured
by the seller. Thereafter, tax funds that continue to subsidize a
program will not fully benefit those for whom they were presumably
intended, but the seller will have made a capital gain.

A classic example can be drawn from the experience of
federal farm programs. Taxpayers and consumers have been spending
billions annual to aid some farmers. In practice, of course, these
programs have often -- and intentionally -- reduced farm output and
raised consumer prices. The consumer-taxpayer is thus dealt a double
blow, in effect subsidizing an increase in his own food prices. Yet
the operating farmer, burdened with a higher land price, fails to get
the full benefits of the programs established for his welfare.

In farm programs, as in some other subsidy programs, the expected
annual benefits are capitalized into higher land prices. Then, after
land prices have gone up to reflect these benefits, the annual
payments to farm operators in effect support the higher land prices.
In effect, the seller of land realizes the benefits of government
subsidy into perpetuity. A somewhat similar pattern is to be expected
in other public spending programs, including those concerned with
urban renewal, where benefits are localized. The pattern shows that
farm programs do not raise wages of low-paid farm labor, that urban
projects do not rid cities of slums, and that the taxpayer-consumer
bears the burden of both.

This volume explores, and at least attempts to define, the extent
to which land values tend to capture the benefits of subsidies and
other government spending through capitalization. It includes papers
by proponents as well as critics. The contributors, who include some
of the nation's leading economists, discuss the nature and effects of
farm and housing programs, commodity price supports, transportation
outlays, land preservation projects, water resource development, and
urban renewal programs. Their work will be of more than routine
interest to economists, political scientists, lawyers, political
officeholders and government officials, planners, and all others who
seek to unravel the complex fabric of multi-billion-dollar government
spending programs.

Lowell made contributions in many parts of economics; I am probably familiar with only a small portion of his work, but I am grateful for it.

January 26, 2010

It is interesting to see who wanted to participate in the increase in land value in New York City through investing in the housing deal which attempted to convert middle-class housing into something more upscale:

Many of the other companies, banks, countries and pension funds —
including the government of Singapore, the Church of England, the
Manhattan real estate concern SL Green, and Fortress Investment Groups
— that invested billions of dollars in the 2006 deal stand to lose
their entire stake.

“At the time, it looked like a sound investment,” said Clark McKinley,
a spokesman for Calpers, the giant California public employees’ pension
fund, which bought a $500 million stake in the property. “When the
market tanked, we got caught.”

Calpers, he added, has written off its investment. So has Calsters, a
California pension fund that invested $100 million, as has a Florida
pension fund that put $250 million into the deal. ...

The Government of Singapore Investment Corporation, which made a $575
million secondary loan, and invested as much as $200 million in equity,
stands to lose all of that.

It isn't as if the buyers in this deal were going to build new buildings, or add new housing capacity to NYC on this huge (80 acre) piece of land. They hoped to make minor improvements in very well-located older mid-rise buildings, and collect much higher rent from new up-market tenants than they could collect from the existing middle-class tenants they planned to force out.

NYC's failure to collect any significant share of the rental value of the land in the form of a tax on land value contributed to the perceived opportunities for Singapore, the Church of England, California and Florida public employees and others to reap the benefit from the economic activity of the NY area and the investments made by NY's taxpayers (whose sales are taxed and whose wages are taxed, even if they only work in NYC) and subsidies given by the federal government (e.g., transportation systems). (Do you see any irony in it being the California and Florida pension funds which sought to collect a windfall on NYC rent, when those two states have provisions which suppress property taxes and thereby create windfalls for their landholders? I refer to Proposition 13 and "Save Our Homes.")

If NYC wised up, and placed more of its tax burden on its land value, there wouldn't have been the hope for ongoing windfalls for private investors.

There would, likely, also be a lot more housing available to meet the needs of middle class and other folks, because taxing land value nudges the owners of underused land to reconsider, and put their land to better use. No parking lots where a high-rise could be. No urban gardens where a mid-rise could be. No rubble-strewn lots where townhouses could be. No "taxpayers" where a building that meets current needs could be.

Remember Leona Helmsley's famous statement? "WE don't pay taxes. The little people pay taxes." She wasn't describing tax evasion; she was describing how we structure ourselves.

If NYC placed more of its taxation on land value, the big real estate operators WOULD be paying their share of the costs of providing the services which make NYC NYC, and there wouldn't be windfalls for CALPERS, Singapore or the Church of England, or the next generation of Leona Helmsleys. There wouldn't be land speculation. There would be a more stable and vital economy, in which all of us could prosper.

But obviously, the powers-that-be prefer the status quo -- the system which has funneled 71.8% of America's net worth into the portfolios of 10% of us, leaving 13.5% for the middle class -- the second 10% of us -- and best wishes! to the other 80%.

And, given last week's Supreme Court decision on corporations being entitled to free speech, that 71.8% is going to drown out those who see things differently.

November 09, 2009

I came across an interesting table in a November, 2007, Federal Reserve Board Study entitled "First-Time Home Buyers and Residential Investment Volatility" by Jonas Fisher and Martin Gervais, and another version from "Why Has Homeownership Fallen Among the Young?" (FRB, March, 2009), by the same authors.

While median income (in real dollars) has fallen, the ratio of median house price to median income has nearly doubled, down payments at the median are down by over 1/3, and, perhaps most important, the proportion of after-tax income going to mortgage payments has nearly doubled, to 40%. Consider also that in 1976, most mortgages were fixed rate instruments, while by 2005, a very high percentage were adjustable rate mortgages, whose interest rate could rise by 2% at the end of the first year, raising that proportion higher in the second year.

And then, of course, in addition to paying 40% of after-tax income to the mortgage lender, our young people must also pay taxes: payroll taxes, wage taxes, sales taxes, taxes on their house and the land on which it sits. Those who have read this blog for a while will know that placing the largest share of our tax burden onto land value would have many desirable effects, including reducing the selling price of land to a nominal amount. Instead of borrowing from a mortgage lender a large sum to pay the seller for land value the seller didn't create, we'd pay land rent to our community, which would keep some of it for local purposes, and pass some up to the state and the federal government -- revenue which would replace some or all of the state sales and income taxes, and the federal income taxes.

And that 40% is mostly interest, not principle payment. Depending on the interest rate, in the first year of a mortgage, one pays 70% (at 4%), 78% (at 5%), 83% (at 6%), 88% (at 7%) 91% (at 8%) of one's mortgage payment as interest, and only 30% to 9% to pay down principle. The fact that, for some, mortgage interest isn't taxed, should be little consolation. (Why "for some"? Because for many families, the standard deduction is a better deal than itemizing deductions. Most homebuyers don't realize that, and assume they'll benefit as homeowners.)

Yet another FRB study, from May, 2006, showed that in the top 46 metro areas, on average, land value represented 51% of the value of single-family residential property. In San Francisco metro, the figure was about 88%; in NYC and Boston metros, it was well over 70%. Oklahoma City was the lowest, in the 20's range.

Homesellers reap gains they didn't sow. Mortgage lenders get to pocket large shares of young people's wages. There has to be a better way. Longtime readers will know what it is: shift our taxes onto land value, and off productive activity.

Table 2: Characteristics of First Time House Buyers

Statistic

1976

1986

1996

2005

Median Real Income

$35,972

$35,481

$33,151

$30,281

Median Price/Median Income

1.5

1.9

2.5

2.8

Mean Down-payment/Price

.18

.13

.12

.11

Mean Monthly Payment/After-Tax Income

.23

.30

.35

.40

Notes: The table entries are from various issues of The Guarantor,
1978-1998, the 2005 National Association of Realtors Profile of Home
Buyers and Sellers, and 2005 American Housing Survey. The Real median
income is based on the CPI. Mean Monthly Payment/After-Tax Income
before 2005 is from The The Guarantor. In 2005 we made an assumption
about the average tax rate, .25, to calculate this variable.

August 18, 2009

A May, 2009, paper by Michael LaCour-Little, Eric Rosenblatt and
Vincent Yao entitled "Follow the Money: A Close Look at Recent Southern
California Foreclosures" provides some interesting data about
single-family residential real estate in one part of the US.

Briefly, the paper looks at loans in five southern California counties
which went into foreclosure in November in 2006, 2007 and 2008.
It traces the collateral and loans from purchase to foreclosure, and
provides some useful findings. Here's their abstract:

AbstractThe conventional wisdom is that households unfortunate enough to
have purchased at the top of the market during the recent housing
bubble are those most at risk of default due to recent price declines,
upward re-sets of adjustable rate mortgage instruments, the economic
downturn, and other factors. Here we use public record data to study
three cohorts of Southern California borrowers facing foreclosure in
2006, 2007, and 2008. We estimate property values as of the date of the
scheduled foreclosure sale with the automated valuation model of a
major financial institution and then track sales prices for those
properties that actually sold, either at auction or later as REO. We
find that borrowers did not, in general, buy at the top of the market
and virtually all had taken large amounts of equity out of the property
through refinancing and/or junior lien borrowing. Given sales prices of collateral
thus far, aggregate losses to lenders will reach almost $1.0 billion
dollars compared to almost $2.0 billion dollars of equity previously
extracted by property owners.

They do for mortgage foreclosures what Elizabeth Warren (et al)'s, study did for understanding the role which uninsured medical expenses play in personal bankruptcy filings. California may be a more extreme case, for reasons which relate to the perverse incentives involved in the 1978 Proposition 13 property tax limitations. But my interest is not the same as what the authors were driving after.

I took their data and created a small spreadsheet to look at the data from a different point of view.

Their sample is composed of 4,258 properties which went into foreclosure in Novembers of 2006, 2007 and 2008. On average, the properties in each of the three cohorts had been purchased in 2002, and for an average price of $356,200. By November 2006, the properties which went into foreclosure that month had an average value of $519,000 (as calculated by a commercial proprietary Automatic Valuation Model). I made the assumption that the properties which were foreclosed on in November 2007 and November 2008 had the same AVM valuations in November 2006.

My calculations proceed as follows: I compare the average 2002 purchase price of $356,200 (a weighted average of the three cohorts) with the 2006 AVM valuation of $519,000, which provides a 4-year appreciation of $162,800 per property. Assuming that each homeowner's annual property taxes started at 1.25% of their 2002 purchase price, and rose by the Prop 13 maximum of 2% per year, they each paid, on average, $19,578 in property taxes over 4 years.

Houses don't appreciate. They depreciate at about 1.5% per year. They're never worth more than what it would take to reproduce them. Taking 65% as an estimate of the share of the value of single family homes in southern California which can be attributed to land (1998 was 64.9% and 2004 was 78.7% in Los Angeles, according to Davis & Palumbo, May, 2006), 65% of the 2002 purchase price of $356,200 is $231,535. Let's assume that the house doesn't depreciate at all, to account for owner-made improvements. Land value, then, rose from $231,535 on average in 2002 to $394,300 by 2006.

So what produced that rise in land prices?

Some of it has to be attributed to the increase in population during that period of time -- due to fertility, improved public health, immigration from other countries and other states. New relationships and broken relationships both contribute to the demand for housing. Since the quantity of land is fixed, land prices tend to rise with population.

Some of it has to be attributed to relaxed lending standards, which permitted more people to borrow more money

Some of it has to be attributed to changes in interest rates, which permitted more borrowing for the same monthly payment.

Some of it has to be attributed to Proposition 13, which limited property taxes to 1.0% (in practice, roughly 1.25%) of the original purchase price, with an annual increase capped at 2%. The annual rental value of land is generally 5% of the purchase value, so the 3.75% to 4% difference gets capitalized into the selling price of the land.

But let's think, too, of why people were willing to pay more to live in these five counties. It was due to the schools, to jobs, to the roads, the sewers, the water system, the police and other emergency services, buses and trains, airports, the courts, jails and prisons, the universities, the hospitals and libraries, and public health and a myriad of other publicly provided goods. The homeowners as homeowners paid only about $20,000 in taxes, and received, if the AVM is correct and they sold in 2006, $162,800 in appreciation on their land.

The study shows that those who were in the 2006 foreclosure cohort had total average housing-related debt by November, 2006, of $469,000, up from the original loans of about $334,400. So they'd taken out an average of $134,600 by borrowing against their home equity.

Did the services which contributed to raising that land value by over $160,000 over 4 years really only cost $20,000 per property? No. Sales taxes, and wage taxes and other taxes also financed those services. And they were paid not just by landholders -- the roughly half of southern California residents who own their own homes -- but also by the other half, who rent their homes from others.

So homeowners reaped a huge windfall, and those who were not homeowners ended up financing it. And as we attempted to increase the homeownership rate by a few percent by relaxed lending standards, they got to pay another time.

Most people think there is no viable alternative. They're so used to the current structure -- and in California, Proposition 13 is sometimes referred to as the "Third Rail" of California politics" (touch it, and you die!) that few stop to consider that our taxes are at the root of our most serious problems.

So what's the alternative? Sanity would be for all those public goods whose effect is to support and increase property values to be financed by a tax on land value. Justice -- ditto. Efficiency -- ditto.

California is floundering because it can't fund its spending. And yet these 4,258 households stood to collect from buyers, if they sold in 2006 after buying in 2002, an aggregate windfall of $693 million: I've aggregated the data for these November foreclosures and here's the story.

Folks who think they and people like them stand to reap a gain of $700 million on an investment of $264 million in 4 years, while paying just $78 million in property taxes may not consider it to be in their best interests to shift taxes off wages, off buildings, off sales.

Had Proposition 13 not been in place, and property owners paid just 1.25% of their properties' market value each year, aggregate property tax would have been $97,500,000, or about 25% more (assuming straight-line increase from 2002 purchase to 2006 average value of $519,000). Still a tiny fraction of the appreciation.

The study's sample was only the November foreclosures. To approximate the figures for all the foreclosed properties in the five counties in those 3 years, one might multiply by 12. And recall that foreclosures are still a tiny fraction of all single-family residential properties in these five counties, and that these are relatively newly purchased properties. Think of how much could be collected in the form of a tax on land value if everyone, no matter what year they bought their property, paid at the same millage rate on their true market value, instead of some paying on values based in the 1970s.

We-the-people created that appreciation. Should homeowners and other landholders get to keep it as if they created it? Does the answer to that question hinge on whether the homeownership rate is 30%, or 50%, or 65%, or 75% in that particular place, or in our country as a whole? Or is the homeownership statistic irrelevant to the justice or logic of this privatization? (Remember that residential real estate is frequently NOT the biggest piece of this: the urban real estate owned by corporations, REITs, foreign investors including airlines and sovereign funds, pension funds, philanthropies, 150-year trusts, private equity funds and other private entities, appreciates far faster. (Remember Leona Helmsley's description: we don't pay taxes; the little people pay taxes.)

On the other hand, when one takes into account the fact that the run-up in prices this situation has led to a situation in which all these people have been foreclosed on, a large and rising proportion of mortgages are "under water" and observers are saying that the "bust" portion of this boom-bust cycle is going to leave something like 50% of mortgage holders "under water" by 2011, perhaps one might reach the conclusion that even if one is not convinced of the justice of revising our system, one might choose it strictly on the basis of avoiding boom-bust cycles being wise.

August 12, 2009

A few lifts from an interesting paper. It speaks only to oil usage related to cars, putting aside heating oil and other uses of oil.

What it misses is the fact that our incentives are aligned to create sprawl, and that until we realign them, we aren't going to get smart growth. Readers of this blog know that the first realignment -- necessary, if not sufficient -- is a reform of the conventional property tax, shifting taxation off buildings and onto land value, followed by a shifting of more of the tax burden off sales and wages and onto land value. When we tax land value heavily, only good things happen --

from the point of view of the environment,

from the point of view of efficiency,

from the point of view of the economy,

from the point of view of encouraging smart growth,

from the point of view of job creation and affordable housing,

from the point of view of dense cities and walkable cities and effective public transit which people want to use and are willing and able to rely on, day in and day out.

The NRDC is not going to achieve its goals without the tool of land value taxation. "Targets" and "funding" are all well and good, but they don't counteract the current disincentives that our system of taxation creates. I'd be happy to provide the NRDC folks with material which will help them understand the needed change.

Good public transit systems can be fully funded by the increased land value they create.

From their paper:

America’s dependence on oil is problematic in several ways, including the following:

The United States has less than 2 percent of the world’s oil supplies but is responsible for about one-quarter of the world’s oil consumption.2 We import almost two-thirds of our crude oil supply from foreign countries, and more and more of the world’s future supply will come from regions that are either politically unstable or unfriendly to U.S. interests.3

Our unstable supply of oil threatens our national economy, particularly since about 96 percent of our transportation system relies on oil.4

Oil consumption is a leading contributor to the greenhouse gas (GHG) emissions that cause global warming. In the United States, the oil-based transportation system is responsible for roughly one-third of our global warming pollution

...

Smart growth and public transit. States can reduce oil dependence by integrating land use and transportation policies and designing them to reduce vehicle-miles traveled and promote alternatives to driving. Nineteen states, including Hawaii, Georgia, Tennessee, and Maine, have adopted smart growth measures intended to curb sprawl and reduce the associated traffic and vehicle-miles traveled. Fourteen states have created an agency or other mechanism to develop and coordinate land use policies. Six states have set targets for reducing vehicle-miles traveled. In addition, some states — led this year by New York, New Jersey, and Washington — have prioritized the funding of public transit through the allocation of state funds and/or by transferring portions of their federal highway dollars.

...

Nineteen states have growth management acts. Among the most comprehensive ways of promoting smart growth is growth management legislation, such as Washington’s Growth Management Act (GMA). This GMA affects 29 counties (95 percent of Washington’s population) and requires, among other things, policies covering sprawl reduction, affordable housing, open space and recreation, environmental protection, natural resource industries, permit processing, concentrated urban growth, regional transportation, historic lands and buildings, and public facilities and services.13 Despite Florida Governor Crist’s weakening of his state’s growth management laws this year, growth management legislation was still one of the areas of greatest improvement from last year, when only 12 states had such laws.

Only six states have set targets for reducing vehicle-miles traveled. For instance, the state of Washington amended its GMA to make it even more effective at lowering oil consumption, calling for reductions in per capita vehicle-miles traveled (VMT) of 18 percent by 2020, 30 percent by 2025, and 50 percent by 2050.14

Fourteen states have an agency or other mechanism to coordinate development. Many states have recognized that several different state entities influence development, sometimes in potentially contradictory ways, and have created mechanisms to coordinate public investment that supports development. In 2003, Massachusetts established a powerful Executive Office of Commonwealth Development.15 Such coordination is a vital first step toward smart development, enabling a state to take into account the wide range of relevant influences. We encourage states to use coordinating mechanisms to promote smart growth.

Some states have prioritized the funding of public transit. Public transit systems, such as bus, commuter rail, subway, and light rail programs, are important components in state efforts to promote smart growth and reduce oil dependence. By creating or expanding reliable and accessible public transit programs, states can reduce the number of single-passenger cars on the road, consequently lowering average VMT. And strong public transit provides a critical transportation alternative as gas prices rise. A case in point: Americans drove 1.4 billion fewer highway miles in April 2008 than in April 2007 because of soaring fuel prices; many took trains or buses instead, leading to a surge in transit ridership.16 In 2008, public transportation saw its highest level of ridership in 52 years.17

States have the ability to “flex” certain federal funds that ordinarily would be spent on highway projects and use them to pay for public transit programs. States that choose not to transfer federal funds to transit programs are not necessarily neglecting transit funding, however, as they may be spending more state dollars on transit. The best way to understand state transit prioritization is to compare the amount of total state spending (including flexed federal funds) on mass transit with the total spent on highway programs, as shown in the far right column of Table 3. By this measure, the top five states prioritizing public transit spending are New York, New Jersey, Washington, Massachusetts, and Utah.

June 13, 2009

In the new issue of the Atlantic, there is this very wise pair of paragraphs.

"END ALL TAXES - EXCEPT ONE" by Reihan Salam, Fellow at the New American Foundation
salam@newamerica.net
"The property tax may be the most loathsome tax in America. During the
1970s, a number of activists - angry that their tax burdens were rising
as their neighborhoods became more desirable - pushed to abolish it
altogether. President Nixon proposed significantly reducing state
property taxes by implementing a federal consumption tax that would
fund public education across the country. But when this proved a lost
cause, the masses sought instead to strictly limit annual property tax
increases through a series of ballot initiatives. The result hasn't
been pretty. Chronic revenue shortfalls have crippled local governments
ever since, leading to heavier reliance on punishing state income and
sales taxes.What if the problem isn't the property tax at all but rather, well, all
other taxes? In 1879, Henry George, a brilliant if slightly crankish
autodidact, published Progress and Poverty,
a scathing polemic that blamed all economic ills on the private
ownership of land. A staunch believer in laissez-faire economics,
George found it perverse that we tax productive activities like work
and innovative investment while letting landowners grow rich simply
because they scooped up property at the right time. In that spirit,
George called for a "Single Tax" on the unimproved value of land.
There's a certain compelling logic to the Single Tax that stands the
test of time. When you tax income, aren't you punishing people for
working hard? But when you tax an asset like land, you're simply
encouraging the most valuable use of that land. In the years since
George faded from the scene, a number of economists, from Milton
Friedman to Paul Romer have found virtue in the Single Tax, not least
because it creates the right incentives for government. Simply put, the
better you govern, the more valuable the property. The more valuable
the property, the more revenue you raise."

Bravo! From Reihan Salam's pen to the eyes and ears of all who are trying to figure out how to get us out of our current tax and revenue mess.

And if you're curious about what others have said about land value taxation, google "quotable notables" and "quotable nobels"

P.S. This is part of the cover story, entitled "The Ideas Issue: How to Fix the World"

May 21, 2009

California is looking for stimulus money from the Federal taxpayer, or, perhaps more precisely, from the federal taxpayers' children.

Yet for the past 30 years, California law, created under 1978's Proposition 13" has PROHIBITED the taxation of land value at a rate higher than 1% of assessed value, and, in addition, limits the annual increase in assessed value to 2%, even when and where market values rise by 10% or 20% or more, until the property is resold, which results in both a very low and a very uneven taxation of land value.

This forces California into using taxes which both burden the poor and damage their economy: sales taxes, wage taxes.

It also strangles any effort to collect back for the commons that which our common spending creates. 4 shares for the landholder, 1 share for the community ... or , if you've owned your California property for 10 or 20 years, 9 shares for the landholder and 1 share for the community.

Meanwhile, California has one of the lowest homeownership rates in the entire US. For 1Q 2009, the US homeownership rate was 67.3% (down from a peak of 69.1% four years earlier); California's was 56.8%, down from 59.9% 1Q2005. So nearly half of Californians are paying rent, and paying it to landlords who pass only a tiny fraction of it on to the community in the form of taxes -- leaving the tenants to pay sales and wage taxes. Perverse, cruel, dumb, privilege-maintaining.

The classical economists observed hundreds of years ago that all benefits go to the landlord. Landlords grow rich in their sleep. Land rises in value for reasons which have nothing to do with the activity or inactivity of the individual landholder, and everything to do with the presence of the community, the public spending of the community on infrastructure and services. California's voters -- knowingly or unknowingly, but most likely the latter -- said that that was just fine with them, and the young people and the renters be damned!

Please don't come asking the rest of us to tax our wages to fund your "stimulus" when you won't tax your own landholders more than 1% -- and many of them a tiny fraction of 1% -- to meet your own state's needs.

If your current governor, who benefits mightily from Proposition 13, won't lead you in the right direction, elect someone who will.

April 12, 2009

Georgists -- people who have read one or more of Henry George's books*, and are persuaded of the logic and truth of his findings and diagnosis -- have, for over 100 years, had an answer to share with the rest of us about how to make our economy more just, more honest, more vibrant and more stable; make equal opportunity real; protect the environment from despoilment; reduce the excessive concentrations of wealth and income without destroying incentives which encourage productivity.

* e.g., Progress and Poverty; Social Problems; Protection or Free Trade?; The Science of Political Economy; The Land Question,
etc. Henry George (b. 1839, Philadelphia; d. 1897, NYC) was among the
most prominent and widely read Americans of the late 19th century, and
no one has successfully refuted his observations or his prescriptions;
yet few of us, even economics majors, are exposed to his ideas in
the course of even a highly regarded college or university education.
More of us who know his ideas have found them through our own research,
or through a course at a Henry George School (e.g., NYC, Philadelphia,
Chicago, etc.) or online (henrygeorge.org)

Georgists know some things that other people don't seem to know. It is common sense. It is logical, not all that complex.

Paul Harvey's "thing" was to tell us about "the other part of the story." Well, Georgists know a lot about the rest of the story. We know that federal spending on infrastructure is only half the story of stimulating the economy (and even know that it is not necessary!)

If all we "do" is the federal end of stimulus, we aren't going to get anywhere. We may even make some things worse -- unintentionally, of course, but worse nonetheless -- for a significant percentage of us.

Armed with Henry George's observations, we would know how to fix this economy and create a better one. We can reduce the need for consumer credit, freeing up more funds for productive investment by industry. We can undo the machine which creates poverty and simultaneously enriches a particular class of us.

February 16, 2009

A Paper Read by Lawson Purdy of New
York
Before the League of American Municipalities,
in Session at
Chicago, September 26, 1906.

In 1873, Enoch Ensley, a wealthy planter of Tennessee, wrote to
Governor Brown asking him to call a special session of the legislature
to amend the constitution so that changes could be made in the tax laws
of Tennessee. The tax rate of Nashville was three and one-half per cent
and of Memphis four per cent, and Mr. Ensley said that the burden on
business was insupportable. Great land owner as he was, however, Ensley
did not urge a search for new sources of revenue, but rather the
application of the "rule or motto" which, he said, "It would be well
for the State to adopt and have cut into the stone at the capitol (in
large letters and have them gilded), in the Senate chamber, the hall of
the House of Representatives and in the governor's office, . . . to-wit:

"Never tax anything
That would be of value to your State,
That could and would run away, or
That could and would come to you."

This rule laid down by Ensley has become an axiom, but before it can be
applied the constitutions of about thirty-five States must be amended
by repealing those despotic limitations on legislative power which are
not found in the earlier constitutions, and which should find no place
in the constitution of any free people. Because of constitutional and
statutory restraints upon the power of cities we need discuss only what
can be accomplished in most cities by executive officials under
existing laws.

Conditions of Prosperity.

City officials often regard the city as apart and distinct from the
individual citizens, and sometimes therefore uphold policies which
appear to be in the interest of the city corporation, although opposed
to the interests of the citizens. This is, of course, a short-sighted
view. In reality nothing can be good for the city which is bad for the
citizen, nor bad for the city which is good for the citizens. Again,
many consider the interest of classes and speak of what will be
advantageous to manufacturers or shopkeepers or land owners. This, too,
is a mistaken attitude. Citizens should be regarded alike as men, and
not as the owners or users of some kind of property. All depend upon
the workers who render service for service, and it is fair therefore to
consider the interest of all citizens as bound up in the interest of
those who earn their living; and that city may be regarded as the most
prosperous in which it is easiest and most agreeable to earn a living.

The interests of the city and of its citizens are identical.
Nevertheless, they may be viewed from both standpoints.

February 02, 2009

An article in the Greenwich, CT, Time says that 75% of the town's 12,000 students attend public schools, and that the budget is $127 million per year, or $14,111 per student. Their schools are excellent, and likely the financial management has been magnificent and the debt portion of that spending minimal.

The $14,000 sticks in my mind; it is the amount that Susan Pace Hamill suggests needs to be spent to educate children who are raised in high-poverty neighborhoods.

The vast majority of Greenwich's public school children have plenty of advantages, and many go on to attend America's finest 4-year colleges.

The most truly stupid thing California voters did a long time ago which
is slowly killing the State and underlies everything Sandy is saying is
voting for Proposition 13 back in 1978. The only proper source of
revenue to pay for local and state services (physical infrastructure in
particular) is to assess against the economic value that those
expenditures engender. All public expenditure and most obviously
in the case of expenditure for physical infrastructure results in
increasing land values. They do not increase the value of improvements
but land value only. All economists agree.

The appropriate source of revenue to pay for public services,
therefore, is to assess against the privately held values public
expenditures produce and increase. That value is land
value. The property tax is the only tax that directly taxes land
value. In that regard, the property tax merely takes back for
community use to pay for community provided services the value the
community gives to land. This is the epitome of economic
justice. Unfortunately the property tax is deeply flawed in that
it also taxes the value of improvements the value of which is not
increased by public services but compared to every other tax that by
definition has to fall on labor and capital, the property tax even as
flawed as it was/is contains the only just and economically neutral
form of taxation there is. The tax on community created land value.

January 03, 2009

There was an interesting blog post on the NYT website yesterday, entitled "Gotham Book Mart Holdings are Given to Penn." I found it interesting because it deals with a specialized business which existed in NYC for decades: a bookstore specializing in antiquarian books.

It was most recently housed in a building at 16 East 46th Street, between Fifth Avenue and the top of Grand Central Terminal. The article says that two "benefactors" had bought the building in ~2004 for $5.2 million and leased it to the owner of the bookstore for $51,000 per month. The implication is that the $51,000 monthly rent was a bargain.

January 02, 2009

Tom Lewis describes some of the history of Eisenhower's huge infrastructure initiative, the Interstate Highway system, in the context of Barack Obama's plans to use infrastructure as a job-creation tool.

What most people don't seem to realize is that investments in infrastructure do more than create jobs in the process of the development of the infrastructure and in its maintenance: they also create something else of much larger importance, which we as a society have chosen to pretend is of little or no significance, to our detriment. (How's that for understatement?)

What is it? Every worthwhile infrastructure project creates more land value than the project costs.

I'll repeat that. Every worthwhile infrastructure project creates more land value than the project costs! Therein lies one of the most important keys to solving many of our most serious problems.

December 11, 2008

Eron Lloyd has an excellent post over at Daily Kos. He's writing about Philadelphia, but could just as well be writing about most American cities and towns. He writes,

At the Mayor's third town hall meeting last week on the budget cuts, I
was handing out our Philadelphia LVT brochure to people before the
meeting as usual when I had a brief but interesting exchange. A man
walking into the building took a quick look at my brochure and handed
it back, shaking his head. He said that he works for the city, and that
"there's no money in land" to solve the city's problems. ...

After the meeting, I decided to test this person's belief while walking
along Girard Ave. back to my car. Across the street were some vacant
lots that looked like they'd been empty for years. It appeared to be
about 3-5 lots in size, with huge weeds and junk all over the place.
Rather than describing it in detail, have a look for yourself.

Eron goes on to describe the property, the public records on it, and the location, and then tells us that the property is for sale. I'll leave it to you to read the rest of his post, and to consider how we currently finance public spending, and how the incentives affect our economy -- local and national.